<PAGE>   1
                                   FORM 20-F

              ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934
                    For the fiscal year ended March 31, 1999


                        Commission file number 000-21919

                       DRANSFIELD CHINA PAPER CORPORATION
             ------------------------------------------------------
             (Exact name of Registrant as specified in its charter)



                    Territory of the British Virgin Islands
                -----------------------------------------------
                (Jurisdiction of incorporation or organization)

               8th Floor, North Wing, Kwai Shun Industrial Centre
                     51-63 Container Port Road, Kwai Chung
                       New Territories, Hong Kong, China



Securities registered or to be registered pursuant to Section 12(g) of the Act.
                           Common Stock, no par value
                           --------------------------
                                (Title of Class)


Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act.
                           Common Stock, no par value
                           --------------------------
                                (Title of Class)


         Indicate the number of outstanding shares of each of the issuer's
classes of capital or common stock as of the close of the period covered by the
annual report.
                        Common Stock - 15,585,000 Shares
                        --------------------------------


         Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
                  Yes  X                   No
                      ---                     ---

         Indicate by check mark which financial statement item the registrant
has elected to follow.

                  Item 17  X               Item 18
                          ---                     ---


<PAGE>   2


                               TABLE OF CONTENTS

<TABLE>

<S>               <C>                                                        <C>
Item 1.           Description of Business                                     2

Item 2.           Description of Property                                     6

Item 3.           Legal Proceedings                                           8

Item 4.           Control of Registrant                                       8

Item 5.           Nature of Trading Market                                    8

Item 6.           Exchange Controls and Other Limitations Affecting
                  Security Holders                                            9

Item 7.           Taxation                                                   11

Item 8.           Selected Financial Data                                    11

Item 9.           Management's Discussion and Analysis of Financial
                  Conditions and Results of Operations                       13

Item 9A.          Quantitative and Qualitative Disclosures About
                  Market Risk                                                26

Item 10.          Directors and Officers of the Company                      27

Item 11.          Compensation of Directors and Officers                     30

Item 12.          Options to Purchase Securities from the Company            30

Item 13.          Interest of Management in Certain Transactions             30

Item 14.          Description of Securities to be Registered                 31

Item 15.          Defaults Upon Senior Securities                            31

Item 16.          Changes in Securities and Changes in Security for
                  Registered Securities                                      31

Item 17.          Financial Statements                                       32

Item 18.          Financial Statements                                       32

Exhibit List                                                                 32

SIGNATURE                                                                    33
</TABLE>


                                       1
<PAGE>   3



                                     PART I

ITEM 1.  DESCRIPTION OF BUSINESS.

         Dransfield China Paper Corporation is a 95.8%-owned subsidiary of
Dransfield Holdings Limited ("Dransfield Holdings"), a Cayman Islands company
which was founded by Sir Kenneth Fung, CBE, JP, in the 1940s to market and to
distribute consumer products in Hong Kong. Dransfield Holdings has three
business divisions -

o        a paper business conducted by us, which bought and sold a Proctor &
         Gamble "Tempo" brand-name paper handkerchief, which we distributed to
         retailers until June 1997, and which business division is expanding
         its operations to include paper manufacturing and distribution of our
         own brand-name paper products;

o        a food and beverage division which has breweries in China and the
         United Kingdom and an edible oil factory in China, and which
         distributes alcoholic and non-alcoholic beverages in Hong Kong; and

o        a logistics and services division that provides warehousing,
         deliveries, repair, exhibition and buying-program services to
         affiliated and non-affiliated companies in Hong Kong and China. The
         service division now includes a small consumer electronics department
         that distributes household appliances under the brand names of "Turbo"
         and "DF".

         Our parent, Dransfield Holdings, has been listed on the Hong Kong
Stock Exchange since April 1993.

         Our business was conducted until February 26, 1997, by Dransfield
Paper Holdings Limited ("Dransfield Paper"), which merged with us on that date.

         The purpose of the merger was to transfer, from the Hong Kong Stock
Exchange to the Nasdaq Stock Market in the U.S., Dransfield Holdings' equity in
its paper business division. The paper business dates back to 1975, when A.
Dransfield & Co. Ltd., a wholly-owned subsidiary of Dransfield Holdings,
secured the exclusive distribution rights for Tempo paper handkerchiefs in Hong
Kong and Macau. In 1994 Dransfield Paper, before its merger with us, succeeded
to this business from its sister company and continued to develop a substantial
distribution network principally through supermarkets, drug stores and
newspaper stands for Tempo handkerchiefs.

         Our earlier ability to consistently achieve market share of more than
40% of the paper handkerchiefs market in Hong Kong, through our sales of
Tempo-brand handkerchiefs, represented an excellent base for our preparation to
manufacture and distribute our own "DF" branded paper products, which
distribution commenced in August 1997. In June 1997, we



                                       2
<PAGE>   4

ceased distributing Proctor & Gamble's Tempo product.

         In November 1994, our company undertook to establish business contacts
and to gain experience in buying waste paper, which it did both on an indent
basis (a pre-sold basis) and on an agency basis, all in support of its plan to
expand its business to that of an integrated manufacturer and distributor of
hygienic paper products for consumers. This paper merchanting operation was
organized through the formation of a subsidiary company named C.S. Paper
Holdings (International) Limited, which conducted the following operations:

o        A paper agency company, Central National Hong Kong Limited, through a
         joint venture with Central National Gottesman, Inc., a U.S. company,
         which agency was sold pursuant to an agreement dated March 27, 1997,
         to one of its beneficial owners, and

o        A paper trading company in Hong Kong, Dransfield Paper (HK) Trading
         Limited, which sold and still sells packaging grade papers on an
         indent basis or from stock.

         In August 1997, our company commenced production of our own DF
brand-name paper products at a paper converting facility we established in
Conghua in the city of Guangzhou, Guangdong Province in Southern China - a
major step in our plan to expand our - operations to those of a
vertically-integrated hygienic paper producer and distributor in some of the
largest populated and fastest growing economies of China as well as in Hong
Kong.

THE PAPER INDUSTRY IN CHINA

         China currently has more than 700 business enterprises producing
tissue paper, most of which are small mills with a daily output of 1 to 5
metric tons. Most are cylinder and fourdrinier paper machines with paper widths
of 1,092mm to 1,760mm and speeds of 60m to 120m per minute only. Raw materials
used are mostly mixed waste paper pulp, white paper trimmings, rice and wheat
straw pulp, bagasse pulp, tail pulp of paper mills, waste cotton pulp and
others which have just been simply bleached. Only a few paper machines imported
from overseas together with a few Chinese-made cylinder and fourdrinier
machines use imported wood pulp as raw materials to produce higher grade tissue
paper.

         The following table is an estimate of the utilization of raw materials
in tissue paper plants.



                                       3
<PAGE>   5

TABLE 1
<TABLE>
<CAPTION>
                                                                   ESTIMATED
RAW MATERIALS                              QUALITY               USAGE RATE (%)

<S>                                        <C>                   <C>
100% imported wood pulp or                  Best                      10
Chinese-made cotton pulp

30% imported wood pulp,                     Good                      20
70% wood pulp and waste paper
or quality bleached bagasse pulp

White paper shorts and bleached             Average                   20
rice and wheat straw pulp

Mixed waste paper, ordinary straw           Bad                       50
pulp and tail pulp of paper mills
</TABLE>


         In 1997, an estimated 31 million metric tons of paper and paper boards
were produced in China. Approximately 2.1 million metric tons of hygienic paper
were produced by tissue paper mills. Annual per capita consumption of hygienic
paper is only a fraction of that of the West. For instance, annual per capita
consumption of hygienic paper in the U.S. is over 19kg. In Hong Kong, it is 5kg
and in China around 1.7kg.

         Both the variety and forms of tissue paper are growing day by day in
China's market, including folded handkerchiefs, facials, napkins, bathroom
tissues, kitchen towels and other paper towels and moist tissues.

         From 1988 to 1992, toilet paper accounted for more than 95% of all
tissue paper sold in China. Subsequently, with the improvement in consumer
income, toilet paper accounted for 88% and tissues 12% respectively in the
industrial survey of 1995. In 1997, the estimated proportion of toilet paper
went down to approximately 75% while tissues rose to 25%, of which 15% was
napkins and 10% facials.

         Western packaged facials, handkerchiefs, napkins and bathroom tissues
are now sold in supermarkets of major cities.

         The consumption of tissue paper grew from 680,000 metric tons in 1990
to 2.1 million metric tons in 1997 with an annual compound growth rate of
15.7%. The annual per capita consumption increased from 0.6kg to 1.7kg, which
is still less than 10% of the United States.

         We believe that most hygienic mills producing hygienic paper are
under-financed, poorly managed and producing low grades, covering approximately
65% of the mass market.

         We are building two paper mills that target medium and premium quality
paper product markets. Depending on different grades of raw materials used, our
products can also compete in the top end of the mass


                                       4
<PAGE>   6

market. Currently, the top end of the tissue paper market has achieved
approximately 15% of total market share.

         Our competitors in the China market are:

o        Scott Shanghai (now owned by Kimberly Clark) with an estimated output
         of 14,000 metric tons per annum.

o        Taiwan Long Chen located in Suzhou, Jiangsu Province (now purchased by
         Procter & Gamble) with an estimated output of approximately 14,000
         metric tons per annum.

o        Taiwan Yuen Foong Yu located in Kunshan, Jiangsu Province, with an
         estimated output of 15,000 metric tons per annum.

o        Guangdong Vinda Paper Co. Ltd., the largest and most influential local
         paper mill located in Xinhui, Guangdong Province, with an estimated
         expanded capacity of approximately 30,000 metric tons per annum.

o        Fujian Hengan Holding Co. Ltd. in Changde, Hunan Province now produces
         tissue paper to meet its requirements for production of diapers as
         well as paper. Estimated capacity is approximately 30,000 metric tons
         per annum.

         Given the above-described capacities together with our estimated
production capacity, we believe the requirement for top quality products will
be temporarily met until the next round of economic growth in China for both
domestic as well as on-premise (tourist) consumption.

         Despite the recent double-digit growth in China and the projected
annual growth of around 7%, we assume that the majority of consumers in China
will not afford themselves the luxury expense of hygienic paper products sold
at premium prices for several more years to come. Accordingly, we propose to
position ourself in the mass market as well as in the medium- to premium-priced
quality market. Our rationale is to penetrate the mass market with a view to
cultivating the consumer's purchasing habits, an appreciation of our quality,
and a recognition of our brand name over the years. We intend to have raw
materials for the mass-market products contract-manufactured by smaller paper
mills while meeting the higher end products from our paper mills as they become
commissioned.

RESEARCH AND DEVELOPMENT. We have not incurred any significant expenditures on
research and development activities.

ENVIRONMENTAL CONTROLS. We anticipate that the Chinese Government will increase
its requirements for environmental controls. With this in mind, we are
installing and employing environmental control standards that meet U.S.
standards, which are higher than those currently required by the PRC.



                                       5
<PAGE>   7

         With respect to Paper Mill No. 2, the environmental controls we
proposed and are installing have been approved by the Provincial authorities
and the Central Government. The paper mills will use an enzymatic process as
the deinking agent, which employs a biological agent rather than the
traditional chemical process. Approximately 90% less chemicals will be used.
The entire deinking process has been designed by in-house U.S. and European
experts assisted by an independent consultant. The effluent output is mostly
clay, which can be used as a construction material, and the effluent water will
be treated in lagoons. Similar environmental controls are proposed for Paper
Mill No. 1 and have been approved by the local environmental protection agency.
We expect them to be approved by the Provincial authorities and the Central
Government.

         The effluent water, after treatment, will meet the standards set by
the Chinese Government for biological oxygen demand (BOD), chemical oxygen
demand (COD), suspended solids (SS) and pH.

         Our waste treatment process and plants have been designed by
specialists in the U.S. but are being built locally in China.

         We do not anticipate having to pay any significant environmental
clean-up costs in our operations other than as part of our regular operating
requirements, because prior to the actual installation of the equipment, our
environmental procedures will have met the local authority requirements and
approval.

NUMBER OF EMPLOYEES. On March 31, 1999 we employed 78 persons. Once the
operation in Conghua goes into full operation, the number of employees will
increase substantially, as it will when installation of the deinking and tissue
making operations commence at the paper mills.

VENUE OF SALES. Less than 10% of our sales during the year ended March 31, 1999
were attributable to exports to China. Most of our sales for the last three
fiscal years were in Hong Kong.

PATENTS, COPYRIGHTS AND INTELLECTUAL PROPERTY.

         We hold no patents, copyrights or intellectual property other than
trade marks established for our new paper products for the consumer market. We
are not aware of any patents, trademarks, licenses, franchises and concessions
that would affect our business and production described herein.

ITEM 2.  DESCRIPTION OF PROPERTY.

         CONGHUA - PAPER MILL NO. 1.

         We have the land use rights to 16,011 square meters in a development
zone in Conghua, Guangzhou, PRC on which we have constructed a paper conversion
plant and warehouse, a conference center, and a 52-room guest house. The
recycled pulp production and paper making facilities are planned to be located
on a tract of approximately 35,000 square meters in


                                       6
<PAGE>   8

Xinhui, near Guangzhou, on a major river with ready access to road and river
transportation facilities, near other manufacturers of tissue and industrial
grades of paper, and with an abundant supply of electricity.

         To fill a temporary gap in our production flow pending completion of
our own tissue paper plant, we signed a seven-year agreement in the last
quarter with Jiangmen Sugar Cane Chemical Factory (Group) Company Limited to
operate its Jiangmen paper mill. Under the agreement, we will provide raw
materials and utilize our technical know-how to operate the mill. Jiangmen
Paper Mill is expected to produce up to 5,500 metric tons of tissue paper and
33,000 metric tons of deinked pulp annually. The mill not only provides the
essential step in our multi-stage integration by providing tissue paper for our
own converting facilities but it will allow us to demonstrate our technical
knowledge in preparation for the eventual start-up of DCPC's own tissue paper
plant.

         JIANGYIN - PAPER MILL NO. 2.

         Our joint venture partner has a 50-year land use agreement with the
local authority in Jiangyin for a 65,000 square meters tract on which Paper
Mill No. 2 is being constructed. The tract is adjacent to a navigable river,
accessible to a nearby major highway, near other manufacturers of industrial
grade papers, and adequate to meet medium-term expansion needs. Electricity is
provided by Jiangsu Huaxi Holdings Corporation, a PRC government corporation,
our joint venture partner. Our joint venture partner originally agreed to
inject this parcel of land as part of their capital contribution.

         In an effort to generate funds from sources other than the public
market, we came to an agreement in July 1999 with our joint venture partner to
exchange shares of our common stock in partial payment for land in Huaxi, the
site of Paper Mill No. 2.

         Under the agreement, the Sino foreign equity joint venture
above-described is expected to be converted into a foreign company, wholly
owned by Dransfield Broadsino Paper Holdings Ltd which is 80% held by us.

         The joint venture company was originally established in order to
ensure the adequacy of electricity supply to be provided by its joint venture
partner, a PRC-government corporation. There is now an adequate supply of
electricity in the area in which the factory is situated. We believe we are in
a position to develop and operate the factory on the strengths of our own
management.

         Conversion to a wholly-owned foreign company in the third quarter 1999
will enable us to focus on our investment.

         During the year, we started and in July 1999 completed commissioning
our converting facility at Paper Mill No. 2 in Huaxi, Jiangsu Province. Test
production has commenced.


                                       7
<PAGE>   9


         OFFICE FACILITIES.

         We rent office facilities in Hong Kong from another subsidiary
corporation of our parent, Dransfield Holdings, and share these facilities with
other subsidiary corporations of Dransfield Holdings.

ITEM 3.  LEGAL PROCEEDINGS.

         Neither our company nor any of its property is a party to or the
subject of any material pending legal proceedings other than ordinary routine
litigation incidental to its business.

ITEM 4.  CONTROL OF REGISTRANT.

         We are a 95.8%-owned subsidiary of Dransfield Holdings, a Cayman
company which is listed on the Hong Kong Stock Exchange.

         The following table sets forth, as of August 31, 1999, information
with respect to any person known to us to be the beneficial owner of more than
ten percent of our Common Stock and the total amount of our Common Stock
beneficially owned by the officers and directors as a group:

<TABLE>
<CAPTION>
                                                                         Percent
                    Owner                        Amount Owned           of Class
                    -----                        ------------           --------
<S>                                              <C>                    <C>
         Dransfield Holdings Limited             14,935,000(1)            95.8%

         Officers and Directors as a
              Group (11 persons)                 14,961,786               96.0%
</TABLE>


         -------------------------

         (1)      Represents sole voting and investment powers with respect to
                  these shares.

ITEM 5.  NATURE OF TRADING MARKET.

OUTSIDE THE UNITED STATES

         There is currently no trading market outside the United States for our
Common Stock.

INSIDE THE UNITED STATES

         Our Common Stock is listed for trading on the Nasdaq SmallCap Market
under the symbol "DCPCF."

         Our Common Stock commenced trading in the U.S. on April 2, 1997. The
reported high and the low sales prices have been as follows:


                                       8
<PAGE>   10

<TABLE>
<CAPTION>
                  Calendar Quarters         High      Low
                  -----------------         ----      ---
<S>                                         <C>      <C>
                  1997, 2nd Quarter         $5.250   $2.500
                  1997, 3rd Quarter         $4.875   $3.250
                  1997, 4th Quarter         $4.875   $4.313
                  1998, 1st Quarter         $4.000   $2.750
                  1998, 2nd Quarter         $2.875   $1.625
                  1998, 3rd Quarter         $2.375   $0.750
                  1998, 4th Quarter         $2.125   $0.313
                  1999, 1st Quarter         $2.250   $1.250
                  1999, 2nd Quarter         $1.250   $0.781
</TABLE>


         Of the 15,585,000 outstanding shares of Common Stock, 550,000 shares
are held in the United States by approximately 1,173 record holders and
15,035,000 shares are held in Hong Kong by three shareholders, one of whom,
Dransfield Holdings Limited, a Cayman corporation, owns 14,935,000 shares.

ITEM 6.  EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS.

         The business of our company is conducted in and from Hong Kong and the
People's 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 control over its foreign currency reserves
in part through direct regulation of the conversion of Renminbi into foreign
exchange and through restrictions on foreign trade. 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 following table sets forth the average noon exchange rate between
Renminbi and U.S. dollars for the periods indicated and is expressed in RMB per
U.S. Dollar:


                                       9
<PAGE>   11

<TABLE>
<CAPTION>
PERIOD                    AVERAGE NOON BUYING RATE(1)(2)
------                    ------------------------------
<C>                       <C>
1989                                  3.8149
1990                                  4.8175
1991                                  5.3431
1992                                  5.5309
1993                                  5.7769
1994                                  8.6402
1995                                  8.3700
1996                                  8.3389
1997                                  8.3193
1998                                  8.3008
</TABLE>

---------------------------

Source:  The Noon Buying Rate in New York for cable transfers payable in
         foreign currencies as certified for customs purposes by the Federal
         Reserve Bank of New York.

Notes:

(1)      The Noon Buying Rate did not differ significantly from the Official
         Rate prior to January 1, 1994, the date on which the Official Rate was
         abolished. Prior to the adoption of the PBOC Rate, there was a
         significant degree of variation between the Official Rate and the
         rates obtainable at Swap Centers, such as the Shanghai Swap Center.
         After January 1, 1994 and the unification of the foreign currency
         exchange system there have not been significant differences between
         the Noon Buying Rate, the PBOC Rate and the Shanghai Swap Center Rate.

(2)      The average rates were determined by averaging the noon buying rate in
         New York for cable transfers payable in New York in foreign currencies
         on the last business day of each month.


         The Hong Kong dollar is freely convertible into the U.S. dollar. Since
October 17, 1983, the Hong Kong dollar has been linked to the U.S. dollar at
the rate of HK$7.80 to US$1.00. The central element in the arrangements which
give effect to the link 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, whereby 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 banknotes 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.


                                      10
<PAGE>   12

         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
banknotes, as described above, the market exchange rate has not deviated
significantly from the level of HK$7.80 to US$1.00. See "Selected Financial
Data." The Hong Kong government has stated its intention to maintain the link
at that rate. The Hong Kong 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 on July 1, 1997 (the "SAR"), 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 link at
HK$7.80 to US$1.00, if at all.

         Our company is organized under the laws of the British Virgin Islands
("the BVI"). The relevant BVI law imposes no limitations on the rights of
nonresidents or foreign owners to hold or vote securities of the company, nor
are there any charters or other constituent documents of the company - that
would impose similar limitations.

ITEM 7.  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 our company's securities. U.S. holders of our securities
are subject to no taxes or withholding provisions under existing BVI laws and
regulations. By reason of the fact that we conduct no business operations
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.

ITEM 8.  SELECTED FINANCIAL DATA.

         The following selected financial data for the five years ended March
31, 1999, are derived from the audited consolidated financial statements of our
company and of Dransfield Paper, with whom we merged on February 26, 1997. The
data should be read in conjunction with the consolidated financial statements
and the related notes, which are included elsewhere in this annual report.


                                      11
<PAGE>   13

<TABLE>
<CAPTION>
                                                                       Years ended March 31,
                                           ---------------------------------------------------------------------------------------
                                             1995            1996            1997            1998             1999           1999
                                           HK$'000         HK$'000        HK$'000         HK$'000        HK$"000(1)     US$'000(1)
                                           -------         -------        -------         -------        ----------     ----------
<S>                                        <C>             <C>            <C>             <C>            <C>            <C>
Income Statement Data:

 Net Sales(2)                              94,359          307,047        147,244          54,631          4,812            621

 Income (loss) before interest and
   income taxes and minority                6,951           13,443            329          (3,791)        (8,843)        (1,141)
   interests

 Interest income/(expenses),
   net(2)                                    (198)          (5,603)        (1,810)           (525)          (254)           (33)

 Provision for income taxes                (1,130)          (1,391)          (309)           (417)             9              1

 Income (loss) after income
   taxes but before minority
   interests                                5,623            6,449         (1,790)         (4,733)        (9,088)        (1,173)

 Net income (loss)(2)                       5,215            5,034            (24)         (4,733)        (9,088)        (1,173)

 Basic net income (loss) per share
   (cents)                                     56               54            (16)            (39)           (58)            (7)
</TABLE>


<TABLE>
<CAPTION>
                                                           As at March 31,
                                  ----------------------------------------------------------------------
                                    1995        1996         1997       1998         1999        1999
                                  HK$'000     HK$'000      HK$'000    HK$'000     HK$"000(1)  US$'000(1)
                                  -------     -------      -------    -------     ----------  ----------
<S>                               <C>         <C>          <C>        <C>         <C>         <C>
Balance Sheet Data:

Fixed assets(3)                   25,467       57,880      123,161    178,434      186,642      24,077

Total assets(3)                   91,518      176,577      209,466    211,277      208,338      26,876

Long term liabilities(4)            -          73,459      120,652     53,532       58,359       7,528
</TABLE>

-------------------------

(1)      The translation from Hong Kong dollars into U.S. dollars for the 1999
         data is at US$1.00 equals HK$7.752, the conversion rate prevailing on
         March 31, 1999.

(2)      For a discussion of the reasons for the significant changes in certain
         selected financial data between fiscal years 1997, 1998 and 1999, see
         below, "Management's Discussion and Analysis of Financial Condition
         and Results of Operations" and the subsections thereof as follows: for
         "Net Sales" in the table above, see "Sales" below; for "Interest
         income/(expenses), net" above, see "Interest Expense" below; and for
         "Net income" above, see "Net income" below.

(3)      Total assets decreased to US$26.9 million in 1999, a decrease of


                                      12
<PAGE>   14

         US$435,000 over 1998, which had seen an increase of US$234,000 over
         1997. The 1999 decrease of US$435,000 was mainly attributable to an
         increase of US$1 million in fixed assets, a decrease of US$1.3 million
         in accounts receivables and a decrease of US$143,000 in inventories.
         The 1998 increase of US$234,000 was mainly attributable to an increase
         of US$7.1 million in fixed assets, a decrease of US$43.9 million due
         from fellow subsidiaries, a decrease of US$1.4 million in accounts
         receivables and a decrease of US$1.3 million in inventories.

(4)      Long-term liabilities are composed mainly of US$5.7 million owed to
         the company's parent, Dransfield Holdings Limited and a US$1.8 million
         loan from a related company.


         The following table sets forth certain information concerning exchange
rates between Hong Kong dollars and U.S. dollars for the periods presented,
expressed in HK$ per US$:

<TABLE>
<CAPTION>
Calendar
Period          Period End     Average         High             Low
------          ----------     -------         ----             ---
<S>             <C>            <C>            <C>              <C>
 1991             7.7800        7.7713        7.8025           7.7155
 1992             7.7430        7.7412        7.7765           7.7237
 1993             7.7280        7.7348        7.7650           7.7230
 1994             7.7375        7.7284        7.7530           7.7225
 1995             7.7323        7.7357        7.7665           7.7300
 1996             7.7345        7.7345        7.7440(1)        7.7310(1)
 1997             7.7495        7.7431
 1998             7.7476        7.7467
 1999,Sep 17      7.7663
</TABLE>


-------------------------


Source: Federal Reserve Bank of New York.

Note: The average rates were determined by averaging the noon buying rate in
New York for cable transfers payable in New York in foreign currencies on the
last business day of each month.

(1)      Average High and Low are through 9/17/96; average highs and lows are
         no longer published and, therefore, not available for 12/31/96 and
         thereafter.

ITEM 9. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS.

         The following discussion and analysis should be read in conjunction
with the financial statements and the accompanying notes thereto and is
qualified entirely by the foregoing and by other more detailed financial
information appearing elsewhere. See "Financial Statements." All dollar amounts
are in Hong Kong dollars unless otherwise noted.


                                      13
<PAGE>   15

OVERVIEW.

         We had no business until we merged on February 26, 1997, with
Dransfield Paper. The financial statements included herein (see "Financial
Statements") and the references below to the company's business operations
refer also to Dransfield Paper's financial statements and business operations
before the merger, to which we succeeded upon our merger with Dransfield Paper.
Certain vertical integration activities (see "Outlook" below) are reflected in
the statements of operation and cash flows for the fiscal years ended March 31,
1997, 1998 and 1999.

RESULTS OF OPERATIONS.

         The following table presents, as a percentage of sales, certain
selected consolidated financial data for each of the three years in the period
ended March 31, 1999:

<TABLE>
<CAPTION>
Year ended March 31                       1997           1998           1999
-----------------------------------------------------------------------------
<S>                                      <C>            <C>            <C>
 Sales                                   100.0%         100.0%         100.0%
 Cost of sales                            90.2           91.2           90.9
                                         -----------------------------------
 Gross margin                              9.8            8.8            9.1
                                         -----------------------------------

 Selling, general and
   administrative expenses                11.0           18.7          192.8
 Interest expense                          1.3            1.0            5.3
 Other income and expenses, net           (2.5)          (2.2)           -0-
                                         -----------------------------------
                                           9.8           17.5          198.1
                                         -----------------------------------
 Net loss                                  -0-           (8.7%)       (189.0%)
                                         -----------------------------------
</TABLE>
SALES.

         Sales for 1999 decreased approximately HK$49.8 million (US$6.4
million) or 91% from the prior year as compared with a decrease of HK$92.6
million (US$11.9 million) or 63% in 1998 over 1997. The decreases were due to
the contraction of paper merchanting activities that had been commenced in
November 1994 in an effort to obtain experience and establish business contacts
for a planned expansion into hygienic paper manufacturing. These paper
merchanting activities decreased HK$27.5 million (US$3.6 million), or 41%, in
1998 and then decreased HK$34.8 million (US$4.5 million), or 87.9% in 1999.
There was no sale of the Tempo brand handkerchief for 1999 represented a
decrease of HK$15 million (US$1.9 million) or 100%, over 1998 as compared with
a decrease of HK$65 million (US$8.4 million), or 81%, over 1998. First year
sales of our own manufactured "DF" branded products were approximately
HK$920,000 (US$119,000).


                                      14
<PAGE>   16

GROSS MARGIN.

         Gross margin decreased by HK$4.4 million (US$568,000) in 1999 or 91%
from 1998 as compared with a decrease of HK$9.6 million (US$1.2 million) in
1998 or 67% over 1997. As a percentage of sales, however, the 1999 gross margin
increased to 9.1% of sales from 8.8% of sales in 1998 and 9.8% of sales in
1997. The 1999 increase from the 1998 level was due to the sales of paper
merchanting division achieved at higher margin. The 1998 decrease from the 1997
level was due largely to a decrease in the average gross margin of sales of
Tempo-brand paper handkerchiefs resulting from the termination of a
distributorship in June 1997 as the margin for paper handkerchiefs is generally
higher than the margin for merchanting activities.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.

         Selling, general and administrative expenses for fiscal 1999 decreased
by HK$143,000 (US$21,000) or 1.5% below 1998. In 1998 these expenses decreased
HK$6.8 million (US$879,000) or 42% below 1997. The 1998 decreases were due to a
reduction in the paper merchanting business and the termination of the Tempo
distributorship.

INTEREST EXPENSE, NET.

         The interest expenses of HK$1.8 million (US$238,000) in fiscal 1997,
HK$525,000 (US$68,000) in fiscal 1998 and HK$254,000 (US$33,000) in fiscal 1999
were attributable mainly to the financing of the Company's paper merchanting
activities. The 71% decrease in 1998 from 1997, and the 53% decrease in 1999
from 1998 reflected a reduction in bank loans caused by reduced activities in
paper merchanting.

NET INCOME.

         We had a net loss of HK$9 million (US$1.2 million) in 1999 compared
with a net loss of HK$4.7 million (US$612,000) in 1998 and a net loss of
HK$24,000 (US$3,000) in 1997. HK$8.3 million (US$1.1 million) of the 1999 net
loss were due to

o        a loss of HK$3.9 million (US$510,000) in the paper merchanting
         division,

o        HK$2.8 million (US$359,000) in amortization and depreciation of land
         and building, factory and machinery of our Conghua converting plant
         during the year,

o        HK$630,000 (US$81,000) in corporate expenses, and

o        HK$939,000 (US$121,000) amortization of employee stock option
         expenses.

The 1998 loss was mainly due to a loss of HK$832,000 (US$108,000) in the paper
merchanting division, cost of HK$644,000 (US$83,000) in corporate


                                      15
<PAGE>   17

promotion expenses, cost of HK$200,000 (US$26,000) in production of the first
annual report after listing on NASDAQ, cost of HK$650,000 (US$84,000) in
product development and testing, and cost of HK$1.2 million (US$155,000)
amortization of employee stock option expenses. Our management has reduced our
merchanting activities to the initial needs of our planned paper mills. Yet the
activities, begun in November 1994 and conducted during a period of great
volatility in prices, are believed by us to have been successful in
establishing our credibility and business contacts among suppliers of waste
paper. Sourcing raw materials will be a critical part of our planned vertical
integration of our paper business.

BALANCE SHEET ITEMS.

         Significant changes in several balance sheet items occurred from 1998
to 1999, in particular accounts receivable, inventories, fixed assets, and
shareholders' equity. These changes reflect -

o        the reduction of the company's operations of the high-volume, large-
         inventory, and low-gross-margin paper merchanting activities,

o        the increase in fixed assets from HK$178.4 million (US$23.1 million)
         in 1998 to HK$186.6 million (US$24.1 million) in 1999, reflecting the
         construction works carried out for Paper Mill Nos. 1 and 2, and

o        an increase of support of HK$4.8 million (US$619,000) in the amount
         due to our parent company, Dransfield Holdings, -in fiscal year 1999
         from HK$39.2 million (US$5.1 million) in fiscal 1998.

There were no issuances of Common Stock in fiscal 1999.


                                      16
<PAGE>   18
LIQUIDITY AND CAPITAL RESOURCES.

         We had positive cash flows from operations of HK$6.4 million
(US$831,000) in 1999, HK$19.2 million (US$2.5 million) in 1998 and HK$17.3
million (US$2.2 million) in 1997. The 1999 positive performance was due to
decreases in accounts receivable of HK$10.2 million (US$1.3 million) and a
decrease in inventories of HK$1.1 million (US$143,000). The 1998 positive
performance was due to decreases in accounts receivable of HK$4.1 million
(US$528,000), a decrease in inventories of HK$9.9 million (US$1.3 million) and
the net decrease of amounts due from fellow subsidiaries to HK$16 million (US$2
million). Our additions of fixed assets for our planned paper business
expansion reduced our cash flow by HK$3.1 million (US$405,000) in 1999 and by
HK$4.5 million (US$582,000) in 1998. Fiscal 1997 saw a HK$23.8 million (US$3.1
million) reduction in bank loans, and a HK$26.7 million (US$3.4 million)
conversion of debt to capital stock. Fiscal 1998 saw a further reduction of
HK$16.7 million (US$2.2 million) in bank loans and overdrafts and a receipt of
HK$5.8 million (US$750,000) from new issues of common stock. Fiscal 1999 saw a
repayment of HK$4.1 million (US$533,000) of loans made to us by our parent
company. Significant capital expenditures have been both made and committed
with respect to the acquisition, refurbishment, and installation of equipment,
land and buildings for the company's planned paper business expansion.
Additional capital expenditures of HK$86 million (US$11 million) must be made
to complete the first two paper mills, and additional capital expenditures of
approximately HK$194 million (US$25 million), not yet obtained or committed,
must be made should the we be able to complete our proposed third and fourth
paper mills, as follows:



<TABLE>
<CAPTION>
                                                         US$000s
                                          ----------------------------------------
                                                          To Be
Capital Requirement                       Purchased     Purchased           Timing
-------------------                       ---------     ---------           ------
<S>                                       <C>           <C>             <C>
 MILL NO. 1:
 Used Deink Line (Belgium)                                              Apr 96
 Used Paper Making Machine (USA)                                        Nov 96-Apr 97
 Used Paper Converting (USA, Japan)                                     Jan 96
 Land & Building (USA)                                                  Jan 95-Oct 95
                                           -------                      -------------
          Sub-Total                        $12,362
 New Auxiliary Equipment (China)                          $3,746        Apr 99-Sep 01
 New Environmental Control
   Equipment (China/USA)                       134                      Apr 99-Sep 01
 Infrastructure (China)                      1,034         1,957        Apr 99-Sep 01
                                           -------        ------
          Sub-Total                        $13,396        $5,837
</TABLE>


                                      17
<PAGE>   19
<TABLE>
<S>                                         <C>           <C>                   <C>
 MILL NO. 2:
 Used Deink Line (USA)                                                          Jan 96
 Used Paper Making Machine (Belgium)                                            Jan 96
 Used Paper Converting (USA, Japan)                                             Apr 96
 Land & Building (USA)                                                          Sep 96-Dec 97
                                                                                -------------
          Sub-Total                         $ 7,641
 New Auxiliary Equipment (China)            $ 3,742                             Sep 99-Oct 00
 New Environmental Control
   Equipment (China/USA)                                             206        Sep 99-Oct 00
 Infrastructure (China)                       1,040                1,315        Sep 99-Oct 00
                                            -------        -------------
          Sub-Total                         $ 8,681        $       5,263

 MILL NO. 3:
 Used Paper Making Machine                  $ 1,000                             Nov 96-Apr 97
 (USA)
          Sub-Total                         $ 1,000

 MILL NO. 4:
 Used Paper Making Machine                  $ 1,000                             Nov 96-Apr 97
 (USA)
          Sub-Total                         $ 1,000
                                            -------        -------------
                  TOTAL                     $24,077        $      11,100
</TABLE>

         The source of funds for these capital expenditures for Paper Mill Nos.
1 and 2 was as follows:

         o        $10 million advance from parent, Dransfield Holdings in
                  November 1996 and April 1997, and

         o        $6.5 million advance from Dransfield Holdings from January
                  through August 1997.

         o        $6.5 million advance from Dransfield Holdings from September
                  1997 through March 1998.

         o        $1.0 million advance from Dransfield Holdings from April 1998
                  through March 1999.


         The proposed sources of funds for Paper Mill Nos. 3 and 4 are as
follows:

         o        $25 million by March 2002 from the sale of shares of the
                  company in a rights offering with standby underwriters, and

         o        profits generated from Mills No.1 and No.2.

         Of the advances from Dransfield Holdings to complete Paper Mills Nos.
1 and 2, $5 million were converted into Common Stock of the company in May 1997
at $5 a share. $4.2 million were converted into common stock of the company in
September 1997 at $4.25 per share, and $4.5 million were converted into common
stock of the company in March 1998 at $4.50


                                      18
<PAGE>   20

per share. The proposed source of funds for Plant Nos. 3 and 4 would involve
the issuance of equity securities and, accordingly, represent potential
dilution to our shareholders.

         The accompanying financial statements have been prepared assuming we
will continue as a going concern. As we have incurred recurring operating
losses and have a working capital deficiency, our operation is dependent on the
financial support of our parent company. However, our parent company reported a
consolidated net loss and has a working capital deficiency. These conditions
raise substantial doubt about the parent company's ability to provide financial
support to us and our ability to continue as a going concern.

         We are currently undertaking plans to complete the construction and
commence the profitable operations of the company's paper mills. Management of
our parent company is currently undertaking plans to improve its operating
results and cash flows and to secure continuing support from its bankers and
the major shareholders to provide funding for us. There can be no assurance
that we or our parent company will be successful in implementing these plans.

THE YEAR 2000 PROBLEM.

         Our company, our parent company, and its other affiliates have fully
recognized the importance of the Year 2000 problem, which arises from computer
hardware and software systems using two digits to represent the year. The
problem may cause uncertainty, unreliability or disruption to the operations of
a company during several key dates including, for example, the date "September
9, 1999" and the dates straddling the turn of the millennium "December 31, 1999
to January 1, 2000". We understand the term "Year 2000 Compliant" to mean the
elimination of these problems.

         Beginning in 1997, our parent company formed a working committee to
evaluate its exposure and the exposure of its subsidiaries, including us, to
the Year 2000 problem and then to develop and implement ways to reduce exposure
to the problem. This working committee tested and evaluated our electronic and
mechanical systems. It identified our parent company's three main areas of
possible significant exposure to the Year 2000 problem to lie in its telephone
system, its trading and accounting software and its computer hardware, all of
which we share.

         The working committee then developed a schedule - for the period July
1998 through October 1999 - for the upgrading or replacement of all the
identified systems. It also developed procedures and plans for the continuous
monitoring, testing and evaluation (and where needed, upgrading or replacement)
of electronic and mechanical systems with regard to exposure to the Year 2000
problem.

         We believe that this project is about 80% complete. Besides installing
and activating a new telephone system and accounting and trading software, our
parent company is replacing our computer hardware.


                                      19
<PAGE>   21
         Our parent company has completed the installation of its new Year 2000
compliant local area network (LAN) servers at its head office and at its
Victorison Tradeport in Shenzhen, China. In addition, all mission-critical
computer workstations in our parent company's head office and in the Victorison
Tradeport have been upgraded with Year 2000 compliant workstations and
productivity software. Other workstations that are not mission-critical are
being upgraded gradually with completion expected in mid-October 1999. Certain
operational software which is not mission-critical is also being replaced with
Year 2000 compliant software written, implemented and tested on an in-house
basis. Delivery, implementation and testing of this software are also expected
to be complete by mid-October 1999.

         Our parent company has developed contingency plans which are currently
being reviewed and augmented to ensure smooth and uninterrupted business
operation in the event that it is exposed to failures caused by the Year 2000
problem.

OUTLOOK.

         The statements contained in this Outlook are based on current
expectations. These statements are forward looking, and actual results may vary
materially.

         We are building a vertically-integrated, multi-products, consumer
hygienic paper manufacturing and distribution business. Such a business
expansion began to be planned in 1993. Business contacts in the buying and
selling of unfinished paper were made. Business alliances for two plants in
China were made. Material capital expenditures were both made and committed,
and the first paper converting plant is operational.

         During 1998 we began working with a number of local Chinese paper
mills, sharing our specialized technical knowledge of market recycled pulps.
Although China has initiated a number of reforestation programs, the country is
unlikely ever to become self-sufficient in wood fiber and must import it from
world markets. We believe we are unique in China in our ability to help local
mills purchase imported market recycled pulp, made from wood fiber, and combine
it with local, non-wood fiber to produce an improved grade of pulp that is a
good-quality and cost-effective substitute for imported virgin pulp.


         Our vertical integration plans embrace the following activities, one
of which is operational but all of which are still in the development stage:

         o        Recycled pulp production. We will process waste paper into
                  recycled pulp. Until we need all the recycled pulp for our
                  own further processing, we will offer approximately half of
                  what we produce for sale to other companies in China with
                  paper mills, and we will use the balance in our own paper
                  making operation.


                                      20
<PAGE>   22

         o       Paper making. We will employ our paper making machines to
                 process recycled pulp into jumbo rolls. Until we need all the
                 jumbo rolls for our own further processing, we will offer
                 approximately half of what we produce for sale to other
                 companies in China with paper converting plants, and we will
                 use the balance in our own paper converting plants.

         o       Paper converting. We will convert jumbo rolls of paper into
                 finished paper products, such as bathroom tissue, facial
                 tissue, napkins and handkerchiefs, which finished paper
                 products will be packaged and distributed to customers.

We estimate the net operating margins in these divisions will be as follows:

<TABLE>
<CAPTION>
                      Division                            Net Operating Margin
                      --------                            --------------------
<S>                                                       <C>
               Recycle pulp production                        10 to 15%
               Paper making                                   10 to 16%
               Paper converting                               11 to 21%
</TABLE>

         TIMING OF THE EXPANSION. We plan the business expansion to take place
in two phases, Phase One being the development and completion of Paper Mills
No. 1 and No. 2 and Phase Two being the development and construction of Paper
Mills No. 3 and No. 4. The projected dates for the completion and commencement
of operations of the plants in each of the four paper mills are as follows:

<TABLE>
<CAPTION>
                                    Recycled Pulp            Paper               Paper
                                     Production              Making            Converting
                                    -------------            ------            ----------
Phase 1:  Under construction
----------------------------
<S>                                <C>                       <C>               <C>
  Paper Mill No. 1                 July 2000                 September 2000    Operational
  Paper Mill No. 2                 September 2000            October 2000      Operational

Phase 2:  Planned.  Not under construction
------------------------------------------
  Paper Mill No. 3                 March 2002                March 2002        March 2002
  Paper Mill No. 4                 March 2002                March 2002        March 2002
</TABLE>

                 PAPER MILL NO. 1. Our company invested US$6 million in
establishing a paper conversion plant, a conference center, and a research and
development center in Conghua in the city of Guangzhou, Guangdong Province in
southern China. The paper conversion plant tested production in August 1997,
came on stream in August 1997, and converts jumbo rolls of paper into such
products as toilet tissue, paper handkerchiefs, napkins and facial tissue. Its
maximum capacity is approximately 30 metric tons a day. It will also serve as a
training and as a research and development center to develop our paper business
in the whole country. An expert plant manager with 30 years' experience was
brought from the U.S. to manage and supervise this plant and to develop a
capable production team to spearhead our expansion.

         Distribution of paper products from the paper conversion plant


                                      21
<PAGE>   23

commenced in August 1997 under our own brand name "DF."

         In June 1998, we recruited a 20-year veteran of the converting
business to be responsible for marketing jumbo rolls and finished goods to
P.R.C. and overseas markets.

         A used de-inking plant for recycled pulp production was purchased in
Belgium, dismantled, shipped to China in May 1996, and is planned to commence
operations within eight months of receipt of required funding of about US$5
million. This plant has an output capacity of approximately 90 metric tons a
day. The targeted customers for half of the recycled pulp production of this
plant are located in the Pearl River delta area, which is within eight miles
from this mill, which customers have present annual demand exceeding 800,000
metric tons.

         We will invest a total of approximately US$11.1 million for the
de-inking plant and paper-making plant both of which shall be 100% owned by us.

         To develop a reliable interim supply of quality tissue paper for our
converting facility, in the last quarter we signed a seven-year contract with
Jiangmen Sugar Cane Chemical Factory (Group) Corporation Limited to operate its
Jiangmen paper mill. We will provide raw materials and utilize our technical
know-how to operate the mill. Jiangmen Paper Mill is expected to produce up to
5,500 metric tons of tissue paper and 33,000 metric tons of deinked pulp
annually.


                 PAPER MILL NO. 2. We will invest approximately US$13 million
for a 60-percent controlling voting interest and a 48-percent equity interest
in a paper mill to be established in the city of Jiangyin in Jiangsu Province
90 minutes west of Shanghai, China.

         Paper Mill No. 2 is owned by a Sino-foreign equity joint venture among
our company, Jiangsu Huaxi Holdings Corporation and Broadsino Investment
Company Ltd. ("Broadsino"). The joint venture company, Jiang Ying Dransfield
Paper Co. Ltd. ("Jiang Ying") is 40 percent owned by Jiang Su Huaxi Holdings
Corporation and 60 percent owned by Dransfield Broadsino Paper Holdings Limited
("Dransfield Broadsino Paper"), a company 80 percent owned by us and 20 percent
owned by Broadsino. We have agreed to provide Broadsino's equity contribution
(approximately US$1.9 million) to the joint venture through a loan to Broadsino
bearing compound interest at the rate of six percent a year.

         The project site is located adjacent to a tributary of the Yangtze
River, which tributary will supply water to the paper mill. The Chinese
partners are contributing a 12,000-kilowatt-hour, coal-fired, power plant for
their 40% interest in the joint venture. The power plant is currently supplying
electricity to other plants nearby and will supply the required amount of
electricity and steam to the paper mill. Due to excess power supply in Jiangsu
Province for the foreseeable future, negotiations to exclude the power plant in
the joint venture were


                                      22
<PAGE>   24

completed in July 1999. An agreement was reached with our joint venture partner
under which the equity joint venture will be converted into a foreign company
wholly owned by Dransfield Broadsino Paper Holdings Ltd.

         At the time when the joint venture was initially established, the
paper mill project needed the cooperation of a local partner to facilitate
smooth operation of the joint venture company. Further, it required the supply
of electricity from the power generating plant owned by its joint venture
partner. There is now an adequate supply of electricity in the area where the
factory is situated. We believe we are in a position to develop and operate the
factory on the strength of our own management. Conversion to a wholly-owned
foreign company with the sole operation being the manufacture of paper products
will enable us to focus on our investment.

         We will shortly commence discussion with Broadsino Investment Company
Limited with a view to acquire the 20% equity held by Broadsino in Dransfield
Broadsino Paper Holdings Ltd. Upon successful negotiation and completion, we
will 100% own Paper Mill No. 2.

         The converting facility at Paper Mill No. 2 in Huaxi, Jiangsu Province
was commissioned in July 1999 and is now in test production. Pending completion
of our own recycled pulp production and paper making plant, we will be relying
on an interim supply of quality tissue paper for our converting facility from
Jiangmen Paper Mill with which we have signed a seven-year contract to manage
its production. We will further source lower grade tissue paper from small
local mills in order to meet the requirements of our converting plants to
produce for the mass market.

         Unsorted office waste will be purchased directly from U.S. suppliers
such as Weyerhaeuser, Smurfit, Allan & Co., and Rock-Tenn. We will also make
use of other grades of waste paper to reduce our cost of production.

         A used 120-metric-tons-a-day de-inking plant for recycled pulp
production has been purchased from Georgia Pacific Company in the U.S., and a
used 28-metric-tons-a-day paper making plant has been purchased from VPK in
Belgium. Both arrived in China in May and July 1996.

         Until we need it for our own end products, we estimate we will use
less than half of the 120-metric-tons-a-day recycled pulp production in Paper
Mill No. 2's own tissue paper plant and that we will offer for sale more than
half of the production to other paper mills in the Jiangsu and Zhejiang
Provinces, which have an annual demand of 1,400,000 metric tons.

         Operations are scheduled to commence at the recycled pulp production
plant and at the paper making plant within six to eight months of receipt of
funding of about US$5 million.

                 PAPER MILLS NO. 3 AND 4. We plan to assemble and operate
integrated paper mills - that is, plants for recycled pulp production,


                                      23
<PAGE>   25
for paper making, and for paper conversion - in two other areas. One is in
northern China in the Tianjin area, and the other is in western China in the
Sichuan area. These two paper mills will be installed after the first two
mills, now under construction, are operational. Subject to funding and
satisfactory operation of Mills No. 1 and 2, our plans envision the
commencement of full operations at Paper Mills No. 3 and 4 by the last quarter
of the 2001 financial year. Considerable equipment has already been acquired
for the paper making and conversion plants for Paper Mills No. 3 and No. 4.

         As earlier stated, our plans include recycling waste paper into pulp,
which is against the trend in China of importing virgin fiber. Our survey
indicates that the present annual demand for recycled pulp and jumbo rolls,
such as we expect to produce, in the areas that would be served by our four
planned paper mills, and the annual production of these four planned paper
mills, are as follows:

<TABLE>
<CAPTION>
                                                                      The Company's
                                                                      Planned
                                                                      Maximum
                                                     Potential        Production
                                                     Demand           (Recycled Pulp)
         Phase I Province/City                       (Metric Tons)    (Metric Tons)
         ------- -------------                       -------------    ---------------
<S>                                                  <C>              <C>
         No. 1   Guangdong Province                    861,022          100,000*
         No. 2   Jiangsu Province                      767,050           72,000
         No. 2   Zhejiang Province                     679,100
         No. 2   Shanghai Municipality                 234,547
                                                     ---------          -------
                       Total                         2,541,719          172,000
</TABLE>

<TABLE>
<CAPTION>
                                                                      The Company's
                                                                         Planned
                                                                         Maximum
                                                     Potential         Production
                                                      Demand         (Recycled Pulp)
         Phase II Province/City                    (Metric Tons)      (Metric Tons)
         -------- -------------                    -------------     ---------------
<S>                                                <C>               <C>
         No. 3   Tianjin Municipality                221,400             60,000
         No. 3   Beijing Municipality                101,000
         No. 3   Heibei Province                     128,000
         No. 4   Sichuan Province                    238,750             60,000
                                                     -------            -------
                       Total                         689,150            120,000
</TABLE>
         *includes 40,000 metric tons from Jiangmen Paper Mill


         Our planned production represents only four percent of the annual
requirements of the targeted markets.

         Over recent years the price of virgin pulp has ranged from US$390 to
US$960 a metric ton. The price of office waste paper in the U.S. has


                                      24
<PAGE>   26

ranged from US$20 to US$250 a metric ton. For instance, prices in April 1999
were US$510 (cost and freight from U.S. West Coast to China) for virgin pulp
plus 1% duty, compared with US$110 (cost, freight and duty) for office waste
paper. Recycling costs in China are estimated to average US$200 a ton and not
to exceed US$250 a metric ton. There is little recycled fiber in China, which
fiber sells at prices five to ten percent cheaper than virgin fiber.

         With reference to the volatility of the prices of virgin pulp and
office waste paper, the table below suggests, pro forma, how our planned
integrated facilities would dampen the effects of price volatility with respect
to profit margins:

<TABLE>
<CAPTION>
                                                         (US$ per Metric Ton)
                                            March 1996   March 1997    March 1998    March 1999
                                           ----------    ----------    ----------    ----------

<S>                                         <C>          <C>           <C>           <C>
1.       Virgin Pulp Cost                   $    390      $    520      $    500          $510

2.       Secondary Fiber
         -Raw Material
          (Office Waste)                    $ 20- 70      $ 30-100      $ 30-100        30-100
         -Freight Cost                            80            50            35            35
         -Processing Cost
          (Average)                              200           200           200           200
                                            --------      --------      --------      --------
                                            $300-350      $280-350      $265-335      $265-335

3.       Profit Margin
         -Recycled Pulp(1)                  Low           Medium        Medium        Medium
         -Jumbo Roll(1)                     Low           Medium        Medium        Medium
         -Finished Products                 High          Medium        Medium        Medium
</TABLE>

--------------------------

(1)      Until needed for our own production of consumer hygienic paper
         products, approximately half of this production is planned to be
         available for sale to other paper mills in China.

         From mid-1994 through March 1999, the price of virgin pulp experienced
the most volatility in the last thirty years.

         Our present posture.

         Our paper converting facility in Plant No. 1 is in operation and is
making our own DF-branded products. We are producing four products for
distribution. The mill capacity for each product is initially set as follows:

<TABLE>
<CAPTION>
                 Product                             Approximate Percentage
                 -------                             ----------------------
<S>                                                           <C>
                 Paper handkerchiefs                          9%
                 Tissues                                     26%
                 Napkins                                     14%
                 Toilet rolls                                51%
</TABLE>

                                      25
<PAGE>   27

         We anticipate that our gross margins on sales will be greater than the
margins we received distributing Proctor & Gamble's manufactured Tempo-brand
paper handkerchief. Further, we will be distributing four products, not one.

         The equipment for Plant No. 2's paper converting facility was
commissioned in July 1999. It is not in operation. We plan to convert and
market relatively high grade hygienic paper, using the distribution channels we
developed for the Tempo paper handkerchiefs we earlier distributed. We plan to
expand our distribution network through working with small paper converter
companies who have established distribution networks for lower grade products.

         The company's future results of operations and the other
forward-looking statements contained in this Outlook, in particular the
statements regarding achievement of its expansion plans, capital spending,
costs of office waste paper and virgin fiber, and marketing, involve a number
of risks and uncertainties. In addition to the factors discussed above, among
the other factors that could cause actual results to differ materially are the
following: volatility of prices of office waste paper and virgin fibers, risk
of nonpayment of accounts receivable, inability of the company to obtain its
necessary capital, political instability in China, inflation, unforeseen
competition, weather, loss of personnel as a result of accident or for health
reasons, funding delays, supply interruption, currency fluctuation, market
changes, government interference, or change of laws.

ITEM 9A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS.

         The only market risk to which we are exposed is foreign currency risk.
We trade in Renminbi, U.S. dollars and Hong Kong dollars. Both Renminbi and
Hong Kong dollars are effectively pegged to the U.S. dollar at, respectively,
approximately 8.32 and HK$7.8 to US$1. The table and narrative below describe
how we intend to manage the foreign currency risk.

         Chinese paper mills that import a substantial portion of raw
materials, notably wood fiber, are subject to foreign exchange risk in the
event of a decline in the Renminbi versus the U.S. dollar. Because wood fiber
is traded on the world market in U.S. dollars, a weakening of the local
currency would raise costs, which would normally be passed on to customers. We
will set prices in U.S. dollar equivalents for our market-recycled pulp,
thereby protecting our revenues against exchange rate fluctuations. Export
sales will further help manage foreign currency risk by matching expense and
revenue currencies. To that end, our experienced marketing staff will focus on
extending our sales efforts in neighboring Southeast Asian countries.

         On the cost side, only about one-third of our costs to manufacture
market-recycled pulp are paid in U.S. dollars and are therefore subject to
exchange rate fluctuations. Our unique technical ability to combine imported
waste-paper fiber with local non-wood fiber to manufacture


                                      26
<PAGE>   28

import-substitute, market recycled pulp significantly decreases our dependence
on imported raw materials. Accordingly, the proportion of our costs subject to
U.S. dollar foreign exchange risk is substantially less than that of most mills
that use 100% imported raw materials (see table below).

         There is no ready market in the PRC for our company to enter into
forward exchange rate swaps or other instruments designed to mitigate its
exposure to foreign currency risks.

         However, by establishing prices in U.S. dollar equivalents, by
building export sales, and by reducing the amount of raw material costs we pay
in U.S. dollars relative to our competitors, we will be protecting ourselves
against foreign currency risk, thereby improving our competitiveness and
margins.

TABLE SHOWING IMPACT OF CLOSE TO 50% DEVALUATION OF THE RENMINBI


<TABLE>
<CAPTION>
Exchange            BEFORE DEVALUATION          AFTER DEVALUATION           COST DIFFERENCE
Rate US$1 =               RMB 8.32                  RMB 12.00                PER METRIC TON
                  ----------------------     ----------------------         ---------------
                  Our Mill   Other Mills     Our Mill   Other Mills
                  --------   -----------     --------   -----------
<S>               <C>        <C>             <C>        <C>
Imported cost
per metric
ton, say          US$  150      US$  400     US$  150      US$  400

Renminbi
Equivalent        RMB1,248      RMB3,328     RMB1,800      RMB4,800

Our cost
advantage over       RMB2,080                      RMB3,000                    RMB  920
competitors

US$ difference using the devalued exchange rate                                US$   76
</TABLE>


ITEM 10. DIRECTORS AND OFFICERS OF THE COMPANY.

EXECUTIVE OFFICERS, DIRECTORS AND KEY PERSONNEL

         Set forth below are the names, 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.


                                      27
<PAGE>   29

<TABLE>
<CAPTION>
                                                             Office
                                                              Held      Term of
      Person                          Office                  Since    Office(1)
      ------                          ------                 -------   ---------
<S>                              <C>                        <C>        <C>
Horace YAO Yee Cheong, 53        Deputy Chairman            Apr 1994    Apr 2000
                                 and Chief Executive
                                 Officer

Warren MA Kwok Hung, 42          Treasurer and              Apr 1994    Apr 2000
                                 Secretary, Director

Francis NG Ah Ba, 51             Director                   Jun 1998    Apr 2000

Thomas J. KENAN, 67              Director                   Mar 1997    Apr 2000

Jan YANG, Ph.D., 37              Director                   Apr 1997    Apr 2000

Eric WAI Yip Sing, 35            Group General Counsel      Sep 1997    Apr 2000

James MADISON, 49                General Manager            May 1996    Apr 2000
                                 of Pulp
                                 and Paper

CHOW Yeung Chee, 58              Plant Manager of           Jan 1996    Apr 2000
                                 Guangzhou Dransfield
                                 Paper Ltd.

Manuel ALVAREZ, 63               General Manager            Apr 1995    Apr 2000
                                 of paper con-
                                 verting operations

CHEN Shu Hen, 45                 General Manager of         Apr 1997    Apr 2000
                                 Paper Mill No.1

JIA Yu Qiu, 35                   Plant Manager              Apr 1997    Apr 2000
</TABLE>

--------------------------

         (1)      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.


EXECUTIVE DIRECTORS.

         HORACE YAO YEE CHEONG. Mr. Yao spent 17 years with Arthur Young &
Company, international accountants, where he worked in accounting and business
advisory services and rose to managing partner covering Hong Kong and the PRC.
Mr. Yao's responsibilities include strategic planning, business development,
administration and management of the Group. Mr. Yao holds a master of business
administration degree from a university


                                      28
<PAGE>   30

in the U.S. and is a certified public accountant in the U.S., Australia and
Hong Kong.

         WARREN MA KWOK HUNG. Mr. Ma is a fellow of the Association of
Chartered Certified Accountants and an associate of the Hong Kong Society of
Accountants. He spent 18 years in the accounting profession of which 12 years
are with Dransfield Holdings. He holds a Higher Diploma in Accountancy from
Hong Kong Polytechnic University.

         FRANCIS NG AH BA. Mr. Ng was a founder of Mearl Paper Industries Sdn.
Bhd., in Malaysia and has more than 20 years of experience in the paper
industry. He holds a diploma in Management Development from the ASEAN Institute
of Management in the Philippines.


NONEXECUTIVE DIRECTORS.

         THOMAS J. KENAN. Mr. Kenan has 36 years experience as a practicing
attorney in the United States, primarily in securities, corporation, and
business reorganization law. He holds a master's of comparative laws degree
from New York University.

         JAN YANG, PH.D. Dr. Yang is the founder, president and technical
director of EDT, a bioindustrial company based in Georgia specializing in
providing products and technical service to the pulp and paper industry. Dr.
Yang holds a bachelor of science degree in chemical engineering from Tianjin
University of Light Industry in China, and a doctor of philosophy degree in
biotechnology from Royal (Swedish) Institute of Technology. He has published
over 20 scientific articles and holds numerous patents related to pulp and
paper manufacturing. He is also an honorary professor at Tianjin University of
Light Industry.

SENIOR EXECUTIVES.

         ERIC WAI YIP SING Mr. Wai is Group General Counsel and Assistant to
the Chief Executive Officer of the company. He was the former managing partner
of the Hong Kong office of a U.S. law firm and was in private practice in Hong
Kong and San Francisco for eight years before joining the Company. Mr. Wai
holds a B.A. from Brown University, an M.S. from Stanford University and a
Juris Doctor degree from Boston College Law School.

         JAMES MADISON. Mr. Madison has more than 25 years experience in tissue
paper making and converting. He holds a bachelor of science degree in
mechanical engineering from a university in the U.S.

         CHOW YEUNG CHEE. Mr. Chow has more than 32 years experience chemical
engineering and managing manufacturing plants. He has a bachelor of science
degree in chemistry.

         MANUEL ALVAREZ. Mr. Alvarez has more than 30 years experience in the
paper converting business in the U.S. Prior to joining the Group, he


                                      29
<PAGE>   31

was the Vice President of Production of a major paper company in the U.S.

         CHEN SHU HAN. Mr. Chen is General Manager of Paper Mill No. 1 (Xinhui,
Guangdong Province). Prior to joining our company, he was the General Manager
of Xinhui City Jiangyuan Trading Development Corporation. Mr. Chen graduated
from Jiangmen Wu-Yi University

         JIA YU QIU. Mr. Jia is a Plant Manager for DCPC. He has worked in the
paper industry in China since completing his studies at Northwest Institute of
Light Industry. Most recently he was the General Manager for Yangzhou Zhonghua
Paper Co. Ltd.


ITEM 11. COMPENSATION OF DIRECTORS AND OFFICERS.

         The directors and officers of our company received from it and its
subsidiaries an aggregate of US$453,437 of compensation in the last fiscal year
for their services in all capacities. There are no present plans, arrangements,
or understandings concerning any change in compensation for them. Our company
has no pension, retirement or similar benefits for directors and officers
pursuant to a plan contributed to by our company.

ITEM 12. OPTIONS TO PURCHASE SECURITIES FROM THE COMPANY.

         WARRANTS. Our company has no outstanding warrants as of August 31,
1999.

         STOCK OPTION PLAN. Our company has adopted a stock option plan ("the
Plan"), the major provisions of which Plan are as follows:

         Nontransferable options may be granted by the directors to employees
and executive officers of our company. The options are for four-year terms but
may not be exercised during the first year. The exercise price for each option
shall be set by the directors but may not be less than 80 percent of the
average or closing price of our company's Common Stock during the five trading
days prior to the grant of the option or, if the Common Stock is not trading,
not less than the net book value per share of our company's Common Stock as
reflected in our company's most recent balance sheet. The total number of
shares of Common Stock which can be subject to the options at any time, both
under this plan and otherwise, shall not exceed 10 percent of the number of
shares of Common Stock then outstanding. No person can be granted options
which, if fully exercised, would result in that person's owning more than 25%
of the outstanding shares of Common Stock after such exercise. Some 625,000
options have been granted under the Plan by the company in September 1997 at an
exercise price of $2.80, of which 482,000 options are still valid and
un-expired as of August 31, 1999. As of August 31, 1999, 361,000 options are
held by directors and officers of the company. Subsequent to the balance sheet
date, 28,000 share options were cancelled upon the termination of employment of
certain employees.


                                      30
<PAGE>   32
ITEM 13. INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS.

         Since the inception of the company's predecessor, Dransfield Paper, in
March 1994, and since the merger on February 26, 1997, between Dransfield Paper
and the company, the company has had transactions with fellow subsidiary
companies (that is, companies that are subsidiaries of Dransfield Holdings
Limited) in which Mr. Horace Yao, chief executive officer and a director
earlier of Dransfield Paper and now of the company, had a direct or indirect
interest as a director or as a beneficial shareholder. The fellow subsidiary
companies provided accounting services, electronic data processing, and
building lease and management services, all at rates believed by the directors
of Dransfield Paper and now the company to be at approximately normal
commercial rates. It is proposed that such transactions will continue during
the present fiscal year. The amounts involved are not deemed to be material by
the company.

         Similarly, the company and its predecessor have had, since April 1996,
and still have, transactions with Dransfield Trading Limited, a subsidiary of
Dransfield Holdings Limited which employs and accounts for the activities of the
sales personnel and for the distribution in Hong Kong and Macau not only of the
company's earlier-distributed Tempo products but of the consumer products
distributed by other business divisions of Dransfield Holdings Limited (see
"Business - General"). Under a new distribution agreement, Dransfield Trading
Limited is responsible for marketing and administration of the sales of paper
handkerchief products. The company believes that its use of Dransfield Trading
Limited in this manner results in lower distribution costs for a sales force.
The company has continued to make use of Dransfield Trading Limited for the
sales and distribution of its own DF-branded paper products, distribution of
which products commenced in August 1997. Such arrangement ceased during the year
ended March 31, 1999.

         Mr. Jan Yang was elected a director of the company in May, 1997. He is
the president of EDT (Enzymatic Deinking Technologies) of Norcross, Georgia.
EDT is a specialty chemical provider to the pulp and paper industry. It
produces and sells naturally occurring enzymatic products for specific
applications in pulp and paper mills with emphasis on the deinking process. The
company, after consideration of EDT's products and different products offered
by EDT's competitors, initially proposes to use EDT's enzymatic products in the
Company's paper mills. To the knowledge of the company, EDT's enzymatic product
cannot be obtained elsewhere in the volume expected to be needed. Other,
competing types of chemicals are available at less cost per pound but generally
at more total cost, due to the need for more pounds of product to achieve a
desired result. No purchases have yet been made by the company of EDT's
enzymatic products.

ITEM 14. DESCRIPTION OF SECURITIES TO BE REGISTERED.  Inapplicable.

ITEM 15. DEFAULTS UPON SENIOR SECURITIES.


                                      31
<PAGE>   33

         There has been no material default in the payment 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 16. CHANGES IN SECURITIES AND CHANGES IN SECURITY FOR REGISTERED
SECURITIES.

         Information describing the registered securities of the company is
contained in a Form F-1 Registration Statement filed with the Securities and
Exchange Commission, Commission file number 333-11641. There are no material
modifications, limitations, or changes that have occurred with respect to such
information.

ITEM 17. FINANCIAL STATEMENTS.

         The financial statements of the Company appear as follows:

<TABLE>
<S>                                                                       <C>
         Report of Independent Auditors                                     F-1
          Consolidated Balance Sheets as of March 31, 1998 and
                 March 31, 1999                                             F-2
          Consolidated Statements of Income for the years ended
                 March 31, 1997, March 31, 1998, and March 31, 1999         F-3
          Consolidated Statements of Cash Flows for the years ended
                 March 31, 1997, March 31, 1998, and March 31, 1999         F-4
          Consolidated Statements of Changes in Shareholders' Equity
                 for the years ended March 31, 1997, March 31, 1998,
                 and March 31, 1999                                         F-5
         Notes to Consolidated Financial Statements                         F-6
</TABLE>

ITEM 18.  FINANCIAL STATEMENTS.

         We have elected to provide the financial statements and relevant
information specified in Item 17 in lieu of the those specified in Item 18.

ITEM 19.  FINANCIAL STATEMENTS AND EXHIBITS.

FINANCIAL STATEMENTS. See Item 17 for a list of all financial statements filed
as part of this annual report.

EXHIBITS.  The following exhibits are filed as a part of this annual report:

Exhibit No.

         1        Copies of all amendments or modifications, not previously
                  filed, to all exhibits previously filed.

                                      None

         2        Two agreements of January 20, 1999 between Jiangmen Sugar
                  Cane


                                      32
<PAGE>   34
                  Chemical Factory (Group) Co. Ltd. and Guangdong Dransfield
                  Paper Co. Ltd. relating to the Jiangmen Sugarcane Chemical
                  Factory's paper mill.


         3        List of all parents or subsidiaries of the registrant.*

         *        Previously filed as Exhibit 1 to the Registrant's Form 20-F
                  for the Fiscal Year ended March 31, 1998 (SEC File No.
                  000-21919); incorporated herein.


                                       33

<PAGE>   35
                         REPORT OF INDEPENDENT AUDITORS



To the Board of Directors and Shareholders
         Dransfield China Paper Corporation(Incorporated in the British Virgin
         Islands with limited liability)


         We have audited the accompanying consolidated balance sheets of
Dransfield China Paper Corporation and subsidiaries (hereinafter aggregately
referred as the "Group") as of March 31, 1998 and 1999 and the related
statements of operations, cash flows and changes in shareholders' equity for
each of the years in the three-year period ended March 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

         We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

         In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Group at March 31, 1998 and 1999, and the consolidated results of its operations
and its cash flows for each of the years in the three-year period ended March
31, 1999, in conformity with accounting principles generally accepted in the
United States of America.

         The accompanying financial statements have been prepared assuming the
Group will continue as a going concern. As more fully described in note 1 to the
financial statements, the Group has incurred recurring operating losses and has
a working capital deficiency. The Group's operations are dependent on the
financial support of its holding company. However, the holding company of the
Group reported a consolidated net loss and has a working capital deficiency.
These conditions raise substantial doubt about the holding company's ability to
provide financial support to the Group and the Group's ability to continue as a
going concern. Management's plans in regard to these matters are described in
note 1 to the financial statements. The financial statements do not include any
adjustments to reflect the possible future effects on the recoverability and
classification of assets or on the amounts and classification of liabilities
that may result from the outcome of this uncertainty.



/s/ ERNST & YOUNG

Ernst & Young

Hong Kong
30 August 1999



                                      F-1
<PAGE>   36

               DRANSFIELD CHINA PAPER CORPORATION AND SUBSIDIARIES

                CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 1999
       (Amounts in thousands, except number of shares and per share data)

<TABLE>
<CAPTION>
                                                                       Notes        1999            1999          1998
                                                                                     US$             HK$           HK$
                                                                                   -------         -------       -------
<S>                                                                    <C>         <C>             <C>           <C>
ASSETS
Current assets
    Cash and bank balances                                                             155           1,203         2,065
    Accounts receivable, net                                             6              55             430        10,663
    Inventories, net                                                     7             183           1,415         2,521
    Prepaid expenses                                                                   111             863           934
    Income tax recoverable                                                              12              92            61
                                                                                   -------         -------       -------
Total current assets                                                                   516           4,003        16,244
Fixed assets                                                             8          24,077         186,642       178,434
Loan to a related company                                                9           1,851          14,350        14,350
Deposit for fixed assets                                                               406           3,143         2,049
Other assets                                                                            26             200           200
                                                                                   -------         -------       -------

                                                                                    26,876         208,338       211,277
                                                                                   =======         =======       =======

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
    Accounts payable                                                                    74             571           465
    Accrued liabilities                                                                197           1,527         1,219
    Due to a minority shareholder                                       12             313           2,421         2,452
                                                                                   -------         -------       -------
Total current liabilities                                                              584           4,519         4,136
Due to holding company                                                  13           5,677          44,009        39,182
Loan from a related company                                              9           1,851          14,350        14,350
                                                                                   -------         -------       -------
                                                                                     8,112          62,878        57,668
Shareholders' equity:
Common stock, no par value,
    40,000,000 shares authorized;
    15,585,000 issued, and fully paid up                                            19,812         153,584       153,584
Contributed surplus                                                     24             471           3,653         2,714
Accumulated deficit                                                                 (1,519)        (11,777)       (2,689)
                                                                                   -------         -------       -------
Total shareholders' equity                                                          18,764         145,460       153,609
                                                                                   -------         -------       -------

Total liabilities and shareholders' equity                                          26,876         208,338       211,277
                                                                                   =======         =======       =======
</TABLE>


              The accompanying notes form an integral part of these
                       consolidated financial statements.


                                      F-2
<PAGE>   37

               DRANSFIELD CHINA PAPER CORPORATION AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS
      FOR THE YEARS ENDED MARCH 31, 1997, MARCH 31, 1998 AND MARCH 31, 1999

       (Amounts in thousands, except number of shares and per share data)

<TABLE>
<CAPTION>
                                                      Notes          1999           1999            1998          1997
                                                                      US$            HK$             HK$           HK$
                                                                    ------         ------          -------      --------
<S>                                                   <C>           <C>           <C>              <C>          <C>
Net sales:
    Paper handkerchiefs
       - fellow subsidiaries                           15               --             --           14,992        80,180
    Other paper products
       - third parties                                                 621          4,812           39,639        67,064
                                                                    ------         ------          -------      --------
                                                                       621          4,812           54,631       147,244

Cost of sales:
    Paper handkerchiefs                                                 --             --          (12,935)     ( 68,705)
    Other paper products                                            (  565)        (4,376)         (36,870)     ( 64,107)
                                                                    ------         ------          -------       -------
                                                                    (  565)        (4,376)         (49,805)     (132,812)
Gross profit                                                            56            436            4,826        14,432
Commission income                                                       --             --               --         3,966
Selling, general and administrative expenses            3
    - third parties                                                 (  931)        (7,222)         ( 7,319)     (  9,582)
    - fellow subsidiaries                              15           (  266)        (2,057)         ( 2,103)     (  6,626)
                                                                    ------         ------          -------      --------
                                                                    (1,197)        (9,279)         ( 9,422)     ( 16,208)

Interest income                                                          -              -               12            32
Interest expense                                       10           (   33)        (  254)         (   537)     (  1,842)
Loss on disposal of subsidiaries                       11               --             --          (   406)            -
Other income/(expenses), net                                            --             --               16      (     46)
Compensation from a supplier                                            --             --            1,195             -
Reorganization expenses                                20               --             --               --      (  1,815)
                                                                    ------         ------          -------      --------

Loss before income taxes                                            (1,174)        (9,097)         ( 4,316)     (  1,481)

Provision for income taxes:                             5
    - Current                                                            1              9              100      (    660)
    - Deferred                                                          --             --          (   517)          351
                                                                    ------         ------          -------      --------
                                                                         1              9          (   417)     (    309)
                                                                    ------         ------          -------      --------

Loss before minority interests                                      (1,173)        (9,088)         ( 4,733)     (  1,790)
Minority interests                                                      --             --               --         1,766
                                                                    ------         ------          -------      --------

Net loss                                                            (1,173)        (9,088)         ( 4,733)     (     24)
                                                                    ======         ======          =======      ========

Basic and diluted net loss per share (cents)            2           (   7)         (  58)          (   39)      (     16)
                                                                    ======         ======          =======      ========
</TABLE>


              The accompanying notes form an integral part of these
                       consolidated financial statements.


                                      F-3
<PAGE>   38

               DRANSFIELD CHINA PAPER CORPORATION AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
      FOR THE YEARS ENDED MARCH 31, 1997, MARCH 31, 1998 AND MARCH 31, 1999

                             (Amounts in thousands)

<TABLE>
<CAPTION>
                                                                         1999         1999         1998          1997
                                                                         US$          HK$          HK$           HK$
                                                                       -------      -------      -------       -------
<S>                                                                    <C>          <C>          <C>           <C>  <C>
Cash flows from operating activities:
Net loss                                                               ( 1,173)     ( 9,088)     ( 4,733)      (    24)
Adjustments to reconcile income to net
    cash provided by operating activities:
Minority interests                                                          --           --           --       ( 1,766)
Depreciation                                                               361        2,800          590           439
Deferred income taxes                                                       --           --          517       (   351)
Loss on disposal of subsidiaries                                            --           --          406             -
Profit on disposal of fixed assets                                          --           --           --       (    72)
Stock option compensation expense                                          121          939        1,184             -
(Increase)/decrease in current assets:
Accounts receivable                                                      1,320       10,233        4,081        64,225
Inventories                                                                143        1,106        9,851         9,425
Prepaid expenses                                                             9           71        3,355       ( 1,967)
Income tax recoverable                                                 (     4)     (    31)          --            --
Due from fellow subsidiaries                                                --           --       29,902       (29,902)
Increase/(decrease) in current liabilities:
Accounts payable                                                            14          106      ( 5,566)      (11,148)
Accrued liabilities                                                         40          308      ( 4,045)        3,266
Income tax payable                                                          --           --      (   444)      (   762)
Due to fellow subsidiaries                                                  --           --      (15,851)      (14,076)
                                                                       -------      -------      -------       -------
Net cash provided by operating activities                                  831        6,444       19,247        17,287
                                                                       -------      -------      -------       -------

Cash flows from investing activities:
Acquisition of fixed assets                                                 --           --      ( 2,452)      ( 5,047)
Payment of deposit for purchase of fixed assets                        (   405)     ( 3,143)     ( 2,049)      ( 1,011)
Proceeds from disposal of fixed assets                                      --           --           --           111
Net cash outflow from disposal of and acquisition
    of minority interests in subsidiaries                                   --           --      ( 4,601)           --
                                                                       -------      -------      -------       -------
Net cash used in investing activities                                  (   405)     ( 3,143)     ( 9,102)      ( 5,947)
                                                                       -------      -------      -------       -------

Cash flows from financing activities:
Bank loans and overdrafts, secured                                          --           --      (16,718)      (23,812)
New issue of common stock                                                   --           --        5,805             3
Advances from a minority shareholder                                        --           --        2,452             -
Advances from holding company                                               --           --           --        17,861
Repayment of loan to a minority shareholder                            (     4)     (    31)          --       ( 2,158)
Repayment of loan to holding company                                   (   533)     ( 4,132)     ( 2,873)            -
Dividend paid to a minority shareholder                                     --           --           --       (   833)
                                                                       -------      -------      -------       -------
Net cash used in financing activities                                  (   537)     ( 4,163)     (11,334)      ( 8,939)
                                                                       -------      -------      -------       -------

Net increase/(decrease) in cash and cash equivalents                   (   111)     (   862)     ( 1,189)        2,401
Cash and cash equivalents, at beginning of year                            266        2,065        3,254           853
                                                                       -------      -------      -------       -------
Cash and cash equivalents, at end of year                                  155        1,203        2,065         3,254
                                                                       =======      =======      =======       =======
</TABLE>


              The accompanying notes form an integral part of these
                       consolidated financial statements.


                                      F-4
<PAGE>   39

               DRANSFIELD CHINA PAPER CORPORATION AND SUBSIDIARIES

           CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
      FOR THE YEARS ENDED MARCH 31, 1997, MARCH 31, 1998 AND MARCH 31, 1999
                             (Amounts in thousands)

<TABLE>
<CAPTION>
                                                                                                           Retained
                                                                                                           earnings/
                                                   Common          Preferred          Contributed         (accumulated
                                                    stock           stock               surplus             deficit)
                                                     HK$              HK$                 HK$                  HK$
                                                   -------         ----------         -----------         ------------
<S>                                                <C>             <C>                <C>                 <C>
Balance at March 31, 1996                            3,001                --                 --                2,068

New issue                                                3                --                 --                   --

New issue on conversion of amount due to
    holding company (note 1)                            --            26,687                 --                   --
Capital contribution from a minority
    shareholder (note 24)                               --                --              1,530                   --
Net loss -                                              --                --             (   24)
                                                   -------          --------             ------              -------
Balance at March 31, 1997                            3,004            26,687              1,530                2,044

New issue of 2,300,000 shares of common
    stock at US$1.5 each on conversion
    of preferred stock (note 23)                    26,687           (26,687)                --                   --

New issue of 1,000,000 shares of common
    stock at US$5 each on conversion of
    amount due to holding company                   38,699                --                 --                   --

New issue of 1,000,000 shares of common
    stock at US$4.25 each on conversion
    of amount due to holding company                32,893                --                 --                   --

New issue of 1,335,000 shares of common
    stock at US$4.5 each on conversion
    of amount due to holding company                46,496                --                 --                   --

New issue of 150,000 shares of common stock
    at US$5 each                                     5,805                --                 --                   --

Stock compensation expense (notes 22 and 24)            --                --              1,184                   --

Net loss                                                --                --                 --              ( 4,733)
                                                   -------          --------             ------              -------
Balance at March 31, 1998                          153,584                --              2,714              ( 2,689)

Stock compensation expense (notes 22 and 24)            --                --                939                   --

Net loss -                                              --                --             (9,088)
                                                   -------          --------             ------              -------
Balance at March 31, 1999                          153,584                --              3,653              (11,777)
                                                   =======          ========             ======              =======
</TABLE>

              The accompanying notes form an integral part of these
                       consolidated financial statements.


                                      F-5
<PAGE>   40

               DRANSFIELD CHINA PAPER CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

               (Amounts in thousands, unless otherwise stated and
                   except number of shares and per share data)


1.       ORGANIZATION, GOING CONCERN RISK FACTORS AND BASIS OF PRESENTATION

         (a)      Organization

                  Dransfield China Paper Corporation (the "Company") was
         incorporated in the British Virgin Islands on June 24, 1996 for the
         purpose of merging with Dransfield Paper Holdings Limited ("DPHL"), a
         wholly-owned subsidiary of Dransfield Holdings Limited ("DHL"), a
         company incorporated in the Cayman Islands and the shares of which are
         listed for trading on the Hong Kong Stock Exchange.

                  Pursuant to an agreement executed on August 20, 1996 and
         amended on November 15, 1996 with DPHL and SuperCorp Inc.
         ("SuperCorp"), the then controlling shareholder of the Company, the
         Company merged with DPHL on February 26, 1997 and became a subsidiary
         of DHL. The officers and directors of DPHL became the officers and
         directors of the Company, the surviving corporation.

                  Prior to the merger, the Company distributed 500,000 shares of
         its no par value common stock to shareholders outside the DHL group. On
         February 26, 1997, DHL exchanged its 80 shares of common stock in DPHL
         for a total of 9.3 million shares of common stock in the Company and
         the 2.3 million shares of Series A convertible preferred stock of DPHL
         issued and outstanding were exchanged for 2.3 million shares of Series
         A convertible preferred stock of the Company.

                  The Company was a corporate shell and had no business
         operations at the time it merged with DPHL on February 26, 1997. The
         merger transaction has been treated as a recapitalization of DPHL with
         DPHL as the acquirer (reverse acquisition). The historical financial
         statements of the Company prior to February 26, 1997 are those of DPHL.

                  DPHL was incorporated in the British Virgin Islands on March
         11, 1994 and was inactive until May 19, 1994 when it acquired 100% of
         the issued share capital of Grandom Dransfield (International) and
         Company Limited ("GDI") and Holdsworth Investments Limited
         ("Holdsworth") from DHL. DPHL, in consideration for the above
         acquisition, issued 1 share of common stock at a par value of US$1 to
         DHL.

                  The Company and its subsidiaries (hereinafter aggregately
         referred as the "Group") is principally engaged in a single product
         segment of trading of various types of paper in Hong Kong, Macau and
         the People's Republic of China ("PRC"). The Group is mainly engaged in
         the trading of paper handkerchiefs and fine paper which includes box
         board, art paper and woodfree paper.

                  The acquisition by DPHL of GDI and Holdsworth has been
         accounted for as a combination of companies under common control in a
         manner similar to a pooling of interests and accordingly, the
         historical basis has been used to record the assets and liabilities of
         GDI and Holdsworth as of March 31, 1996 and retroactive effect has been
         given to account for the operations of GDI and Holdsworth in these
         financial statements at the historical cost of DHL. Intercompany
         balances and transactions have been eliminated on consolidation.


                                      F-6
<PAGE>   41


              DRANSFIELD CHINA PAPER CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

               (Amounts in thousands, unless otherwise stated and
                  except number of shares and per share data)


1.       ORGANIZATION, GOING CONCERN RISK FACTOR AND BASIS OF PRESENTATION
         (continued)

         (b)      Going concern risk factors

                  The Group incurred net loss of HK$9,088 (US$1,173) for the
         year ended March 31, 1999 and had consolidated net current liabilities
         of HK$516 (US$67) as at that date and the Group's operation are
         dependent on the financial support by its holding company, DHL.

                  DHL also reported a net loss for the year ended March 31, 1999
         and has a working capital deficiency.

                  Management of the Group is currently undertaking plans to
         complete the construction and commence the profitable operations of the
         Group paper mills. Management of DHL is currently undertaking plans to
         improve DHL group's operating results and cash flows and to secure the
         continuing support from its bankers and the major shareholders to
         provide funding to the Group.

                  There can be no assurance that the Group and DHL group will be
         successful in implementing these plans. The Group's financial
         statements do not include any adjustments to reflect the possible
         future effects on the recoverability and classification of assets or
         the amounts and classification of liabilities that may result from the
         outcome of this uncertainty.

         (c)      Basis of presentation

                  The consolidated financial statements have been prepared on a
         "stand-alone" basis that reflects all costs incurred by the Group in
         operating the business. Such expenses have been adjusted in the income
         statements to reflect all of the cost of doing business.

                  The consolidated financial statements were prepared in
         accordance with U.S. GAAP. This basis of accounting differs from that
         used in the statutory accounts of the Group which were prepared in
         accordance with the accounting principles and the relevant financial
         regulations applicable to accounting principles and practices generally
         accepted in Hong Kong.

                  The principal adjustments made to conform with the statutory
         accounts to U.S. GAAP included the following:

         o        Write-off of advertising expenses deferred;

         o        Write-off of pre-operating expense deferred;

         o        Compensation from related parties; and

         o        Deferred taxation.


                                      F-7
<PAGE>   42

               DRANSFIELD CHINA PAPER CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

       (Amounts in thousands, except number of shares and per share data)


1.       ORGANIZATION, GOING CONCERN RISK FACTOR AND BASIS OF PRESENTATION
         (continued)

         (c)      Basis of presentation (continued)

                  The financial information has been prepared in Hong Kong
         dollars ("HK$"), the official currency of Hong Kong. Solely for the
         convenience of the reader, the financial statements have been
         translated into United States dollars ("US$") prevailing on March 31,
         1999 which was US$1.00 = HK$7.752. No representation is made that the
         Hong Kong dollar amounts could have been, or could be, converted into
         United States dollars at that rate or any other certain rate on March
         31, 1999.

2.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         (a)      Cash and bank balances

                  Cash and bank balances include cash on hand and demand
         deposits with banks with an original maturity of three months or less.
         None of the Group's cash is restricted as to withdrawal or use.

         (b)      Inventories

                   Inventories comprising raw materials held for production and
         goods held for resale, are stated at lower of cost, on a first-in,
         first-out basis, or market.

         (c)      Fixed assets and depreciation

                  Property, machinery and equipment are stated at cost less
         accumulated depreciation. Depreciation of property, machinery and
         equipment is computed using the straight-line method over the assets'
         estimated useful life. The principal annual rates used are as follows:

<TABLE>
                 <S>                                            <C>
                  Land and buildings held in the PRC            Over the period of the land use rights
                  Buildings                                     4%
                  Leasehold improvements                        20% or over the lease terms, whichever is shorter
                  Furniture, fixtures and office equipment      20%
                  Machinery and equipment                       20 - 50%
                  Motor vehicles                                20 - 25%
</TABLE>

         (d)      Income taxes

                  Income taxes are accounted for under Statement of Financial
         Accounting Standards 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.


                                      F-8
<PAGE>   43


               DRANSFIELD CHINA PAPER CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

       (Amounts in thousands, except number of shares and per share data)


2.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

         (e)      Foreign currency translation

                  Foreign currency transactions are translated into Hong Kong
         dollars at the approximate 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 approximate rates of exchange ruling at that date.
         Exchange differences are accounted for in the statement of income.

         (f)      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 lease terms.

         (g)      Revenue recognition

                  Revenue from sales of goods are recognized on delivery to
         third party customers. Commission income is recognized as the services
         are provided.

         (h)      Advertising expenses

                  Advertising expenses, net of cooperative advertising
         reimbursements, are charged to the statement of income when incurred.

         (i)      Use of estimates

                  The preparation of financial statements in conformity with
         generally accepted accounting principles requires management to make
         estimates and assumptions that affect amounts reported in the financial
         statements and accompanying notes. Actual results could differ from
         stated estimates.

         (j)      Employee stock plans

                  The Company 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 exercise price of employee stock
         options over the fair market value of the underlying stock on the date
         of grant, 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 in note 24 to the consolidated
         financial statements.



                                      F-9
<PAGE>   44

               DRANSFIELD CHINA PAPER CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

       (Amounts in thousands, except number of shares and per share data)


2.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

         (k)      Basic and diluted net income/loss per share

                  In February 1997, the Financial Accounting Standards Board
         issued Statement No. 128, "Earnings Per Share". In accordance with this
         statement, the Company changed the method previously used to compute
         net income/loss per share and restated all prior periods presented.

                  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 antidilutive.

                  The basic net loss per share for the years ended March 31,
         1997 and 1998 were computed by dividing net loss applicable to common
         stock, including the cumulative dividends in arrears (note 23), by the
         weighted average number of 9,606,849 and 13,328,014 shares of common
         stock, respectively, which were outstanding during the two years on the
         assumption that the 9.3 million shares of common stock issued to DHL
         upon the effectiveness of the merger had existed at April 1, 1996. The
         basic net loss per share for the year ended March 31, 1999 was computed
         by dividing net loss applicable to common stock by the weighted average
         number of 15,585,000 shares of common stock.

         (l)      Cash and cash equivalents

                  The Company considers all highly liquid investments with a
         maturity of three months or less when purchased to be cash equivalents.



                                      F-10
<PAGE>   45

               DRANSFIELD CHINA PAPER CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

       (Amounts in thousands, except number of shares and per share data)


3.       SUPPLEMENTARY INCOME STATEMENT INFORMATION

<TABLE>
<CAPTION>
                                                                                   Year ended March 31,
                                                                    1999          1999              1998           1997
                                                                     US$           HK$               HK$            HK$
                                                                    -----        -------           ------          -----
<S>                                                                 <C>          <C>               <C>             <C>
         Selling, general and administrative expenses:
             Depreciation                                             361          2,800              590            439
             Advertising expenses                                       -              -               33            825
             Exchange loss/(gain), net                              (   7)       (    53)           (  72)           187
                                                                    =====        =======            =====           ====
</TABLE>


4.       SUPPLEMENTAL CASH FLOW INFORMATION

<TABLE>
<CAPTION>
                                                                                   Year ended March 31,
                                                                    1999          1999             1998            1997
                                                                     US$           HK$              HK$             HK$
                                                                   ------        -------          -------         ------
<S>                                                                <C>           <C>              <C>             <C>
         Cash paid during the year for:
             Interest                                                 354          2,741            5,939          4,687
             Income taxes                                               3             22              344          1,422
                                                                   ======        =======          =======         ======

         Non cash investing and financing activities:
             Loan from a related company
                financed by a loan to a
                related company (note 9)                               --             --              984          7,136
             Fixed assets paid by
                holding company                                     1,156          8,959           52,857         46,999
             Fixed assets paid by certain
                fellow subsidiaries                                    --             --               --         12,203
             Issuance of common stock on
                conversion of the amount due
                to holding company                                     --             --          118,088             --
             Issuance of common stock on
                conversion of preferred stock                          --             --           26,687             --
             Issuance of preferred stock on
                conversion of the amount
                due to holding company                                 --             --               --         26,687
             Compensation from a minority
                shareholder                                            --             --               --          2,747
                                                                  =======        =======         ========         ======
</TABLE>


                                      F-11
<PAGE>   46

               DRANSFIELD CHINA PAPER CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

       (Amounts in thousands, except number of shares and per share data)


5.       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 ("DPT"), wholly-owned
         subsidiaries of the Company, 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, a co-operative joint
         venture formed in the PRC in which the Company has a 100% interest, and
         Jiang Ying Dransfield Paper Co. Ltd. ("JYDP"), an equity joint venture
         formed in the PRC in which the Company has a 48% effective interest,
         are subject to PRC income taxes at the applicable tax rate of 33% for
         Sino-foreign joint venture enterprises. These two joint ventures are
         eligible for full exemption from joint venture 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 the above companies as they have not commenced
         operation as at March 31, 1999.

                  Total income tax expense differs from the amount computed by
         applying Hong Kong statutory income tax rate of 16% (1998: 16.5% and
         1997: 16.5%) to income before taxes as follows:

<TABLE>
<CAPTION>
                                                                                      Year ended March 31,
                                                                        1999           1999           1998          1997
                                                                         US$            HK$            HK$           HK$
                                                                       ------         ------          ----          ----
<S>                                                                    <C>            <C>             <C>           <C>
         Computed expected income taxes                                   188          1,455           712           244
         Non-deductible losses of subsidiaries                         (  105)        (  811)         (581)         (522)
         Difference between Hong Kong statutory
             rate and Singapore statutory tax rate                         --             --            --          ( 40)
         Other                                                              1              9           100             9
         Valuation allowance                                           (   83)        (  644)         (648)           --
                                                                       ------         ------          ----          ----

         Tax credit/(charge) for the year                                   1              9          (417)         (309)
                                                                       ======         ======          ====          ====
</TABLE>


                                      F-12
<PAGE>   47

               DRANSFIELD CHINA PAPER CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

       (Amounts in thousands, except number of shares and per share data)


5.       INCOME TAXES (continued)

         Deferred tax asset is comprised of the following:

<TABLE>
<CAPTION>
                                                                                        1999          1999          1998
                                                                                         US$           HK$           HK$
                                                                                        ----          ----          ----
<S>                                                                                     <C>         <C>             <C>
         Tax losses carried forward                                                      167         1,292           648

         Valuation allowance                                                            (167)       (1,292)         (648)
                                                                                        ----          ----          ----

                                                                                          --            --            --
                                                                                        ====          ====          ====
</TABLE>

                  Due to its history of losses, the Company 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 Company has provided a valuation
         allowance covering 100% of its net deferred tax assets.

                  As at March 31, 1999, the Company has Hong Kong net operating
         loss carry forward of approximately HK$8,075(US$1,042). Currently, the
         net operating loss can be carried forward indefinitely.


6.       ACCOUNTS RECEIVABLE, NET

         Accounts receivable are comprised of:

<TABLE>
<CAPTION>
                                                                                              March 31,
                                                                               1999             1999              1998
                                                                                US$              HK$               HK$
                                                                              ------           ------            -------
<S>                                                                           <C>             <C>               <C>
         Accounts receivable - trade                                             206            1,600             11,013
         Less: Allowance for doubtful debts                                   (  151)          (1,170)           (   350)
                                                                              ------           ------            -------

         Accounts receivable, net                                                 55              430             10,663
                                                                              ======           ======            =======
         Movement of allowance for doubtful debts
         Balance as at April 1,                                                   45              350                 50
         Provided during the year                                                106              820                300
                                                                              ------           ------            -------

         Balance as at March 31,                                                 151            1,170                350
                                                                              ======           ======            =======
</TABLE>


                                      F-13
<PAGE>   48

               DRANSFIELD CHINA PAPER CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

       (Amounts in thousands, except number of shares and per share data)


7.       INVENTORIES, NET

         Inventories are comprised of:

<TABLE>
<CAPTION>
                                                                                             March 31,
                                                                                1999            1999               1998
                                                                                 US$             HK$                HK$
                                                                               -----           ------             ------
<S>                                                                            <C>             <C>                <C>
         Raw materials                                                           105              814              2,053
         Finished goods                                                          143            1,106              1,571
         Less: Allowance for obsolescence and
                       net realizable value                                    (  65)          (  505)            (1,103)
                                                                               -----           ------             ------

         Inventories, net                                                        183            1,415              2,521
                                                                               =====           ======             ======
         Movement of allowance for obsolescence
             and net realizable value
         Balance as at April 1,                                                  142            1,103              1,262
         Provided during the year                                                 --               --                782
         Deduction during the year                                             (  77)          (  598)            (  941)
                                                                               -----           ------             ------

         Balance as at March 31,                                                  65              505              1,103
                                                                               =====           ======             ======
</TABLE>


8.       FIXED ASSETS

<TABLE>
<CAPTION>
                                                                                            March 31,
                                                                              1999             1999               1998
                                                                               US$              HK$                HK$
                                                                             -------         --------           --------
<S>                                                                          <C>             <C>                <C>
         Land and buildings                                                    6,235           48,331             46,760
         Leasehold improvement                                                    29              224                209
         Machinery and equipment                                              17,769          137,748            128,419
         Motor vehicles                                                          511            1,134              1,134
         Furniture, fixtures and office equipment                                146            3,963              3,870
                                                                             -------         --------           --------
                                                                              24,690          191,400            180,392

         Less: Accumulated depreciation                                      (  613)         (  4,758)          (  1,958)
                                                                             -------         --------           --------

                                                                              24,077          186,642            178,434
                                                                             =======         ========           ========
</TABLE>

                  The Group's land and buildings are located in the PRC and held
         under land use rights of 50 years from December 1, 1992 to November 30,
         2041.


                                      F-14
<PAGE>   49

               DRANSFIELD CHINA PAPER CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

       (Amounts in thousands, except number of shares and per share data)


8.       FIXED ASSETS (continued)

                  Since April 1, 1998, depreciation has been provided on the
         machinery and equipment and land and buildings with an aggregate cost
         of HK$120,760(US$15,578), which commenced operation at that date. No
         depreciation was provided on the land and buildings and machinery and
         equipment which were under construction at March 31, 1999. The carrying
         value of the assets which are under construction at the balance sheet
         date amounted to HK$138,893 (1998: HK$174,518).


9.       LOANS WITH A RELATED COMPANY

                  In May 1995, the Company entered into an agreement with a
         third party, Broadsino Investment Company Limited ("Broadsino") to
         establish Dransfield Broadsino Paper Holdings Limited ("DBPHL"), a
         company which is 80% owned by the Company. DBPHL then entered into an
         agreement to establish a Sino-foreign equity joint venture company,
         JYDP, which was 60% owned by DBPHL and was principally engaged in paper
         manufacturing. DBPHL has committed to contribute an amount of US$9.26
         million (approximately HK$72 million) to JYDP, to be financed by a
         shareholders' loan.

                  The Company, DBPHL and Broadsino entered into a loan agreement
         whereby the Company and Broadsino agreed to make an interest-free
         shareholders' loan of US$9.26 million (approximately HK$72 million)
         (the "Shareholders' Loan") to DBPHL. Pursuant to another agreement, the
         Company agreed to make a loan of US$1,852 (approximately HK$14 million)
         to Broadsino, bearing compound interest at the rate of 6 percent per
         annum, to finance its share of the Shareholders' Loan to DBPHL. DBPHL
         has pledged all its assets with the Company and Broadsino for the
         repayment in full of the Shareholders' Loan. In addition, DBPHL also
         undertakes to apply any amounts, including dividends, which may be
         distributed by JYDP to it to repay, in full, the Shareholders' Loan.
         Broadsino has pledged both its 20 per cent shareholding in DBPHL and
         any amount it may receive from DBPHL as repayment of its proportion of
         the Shareholders' Loan to secure the repayment, in full, of the loan
         from the Company. A promissory note has been issued by a wholly owned
         subsidiary of Broadsino in favor of the Company.

                  As at March 31, 1999, the Company advanced HK$14,350
         (US$1,851) to Broadsino for the capital injection in JYDP, which is
         classified as a loan to a related company. The same amount of HK$14,350
         (US$1,851) is recorded in the consolidated financial statements as long
         term loan payable to Broadsino by DBPHL. The loan to and loan from a
         related company have no fixed repayment terms.



                                      F-15
<PAGE>   50
               DRANSFIELD CHINA PAPER CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

       (Amounts in thousands, except number of shares and per share data)


10.      BANK BORROWINGS

                  The Group has utilised the banking facilities of the holding
         company to finance the Group's capital investment. The interest
         incurred on the banking facilities were reimbursed by the Group based
         on the actual interest charged by the banks.

                  Interest expense on the above-mentioned bank borrowings, net
         of the amounts capitalized, is as follows:

<TABLE>
<CAPTION>
                                                                                          Year ended March 31,
                                                                       1999          1999            1998          1997
                                                                        US$           HK$             HK$           HK$
                                                                      -----         ------          ------        ------
<S>                                                                   <C>           <C>             <C>           <C>
         Interest incurred                                              354          2,741           5,939         4,687
         Interest capitalized                                          (321)        (2,487)         (5,402)       (2,845)
                                                                      -----         ------          ------        ------

         Interest expense                                                33            254             537         1,842
                                                                      =====         ======          ======        ======
</TABLE>

         As at the balance sheet date, the interest rates on the above-mentioned
         bank borrowings ranged from 5.75% to 10.25% per annum (March 31, 1998:
         9.00% to 11.00% per annum).


11.      ACQUISITION AND DISPOSAL OF SUBSIDIARIES

                  On March 27, 1997, the Company entered into a sale and
         purchase agreement to acquire the remaining 33.3% interest in CS Paper
         Holdings (International) Limited, a 66.7% subsidiary of the Company,
         and certain of its wholly-owned subsidiaries (collectively the "CSP
         Group") and to dispose of Dransfield Paper (S.E.A.) Pte. Limited
         ("DPSEA") and Central National Hong Kong Limited ("CN"), subsidiaries
         in which the Company had 66.7% and 34% equity interests, respectively.

                  The agreement was declared unconditional on May 9, 1997. The
         net amount of consideration payable to the minority shareholder of HK$3
         million (US$388) was settled in cash on June 4, 1997. The net cash
         outflow of the above transactions amounted to HK$4,601 (US$595) which
         consisted of the aforesaid consideration of HK$3 million and cash and
         bank balances of HK$1,601 (US$207) of the subsidiaries disposed of.

                  The loss on disposal of DPSEA and CN amounting to HK$406
         (US$52) is reflected in the Company's statements of operations for the
         year ended March 31, 1998.



                                      F-16
<PAGE>   51

               DRANSFIELD CHINA PAPER CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

       (Amounts in thousands, except number of shares and per share data)


12.      DUE TO A MINORITY SHAREHOLDER

                  The balances at March 31, 1998 and 1999 represent a loan from
         a minority shareholder, which is unsecured, interest-free and has no
         fixed repayment terms.


13.      DUE TO HOLDING COMPANY

                  As mentioned in note 10, the unsecured long term liability
         arose when the Group utilized the banking facilities of the holding
         company to finance the Group's capital investment. The interest
         incurred on the banking facilities were reimbursed by the Group.

                  The Group's operations are dependent on the financial support
         of its holding company which has agreed that it will not demand payment
         of the amount prior to April 1, 2000.


14.      COMMITMENTS

                  As of March 31, 1999, the Group had outstanding capital
         commitments of HK$30 million (US$3.9 million).


                                      F-17
<PAGE>   52

               DRANSFIELD CHINA PAPER CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

       (Amounts in thousands, except number of shares and per share data)


15.      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.

<TABLE>
<CAPTION>
                                                                                Year ended March 31,
         Nature of transactions                         Notes        1999         1999         1998        1997
                                                                      US$          HK$          HK$         HK$
                                                                    ------       ------      -------     -------
<S>                                                    <C>         <C>          <C>          <C>         <C>
         Revenue:
         Sales of products                               (a)            --           --       14,992      80,180
                                                                    ======      =======      =======     =======
         Expenses:
         Electronic data processing, accounting
             services and personnel and
             administrative charges                      (b)           187        1,447          632         801
         Storage and delivery charges                    (c)            70          541        1,232       5,561
         Equipment rental                                (d)            --           --           33          55
         Operating lease rental for land
             and buildings                               (e)             9           69          206         209
                                                                    ------       ------      -------     -------

                                                                       266        2,057        2,103       6,626
                                                                    ======       ======      =======     =======
</TABLE>

         (a)      Sales of products

                  Prior to April 1, 1998, the Group sold products to Victorison
         Marketing Limited and Dransfield Pacific Limited, fellow subsidiaries
         of the Company at cost plus 3% (3% in 1997). The Group also sold
         products to Dransfield Trading Limited ("DTL") at cost plus 18% for the
         year ended March 31, 1998. Under this arrangement, DTL is responsible
         for the marketing and distribution of the Group's paper handkerchief
         products. The mark-up is established based on the margins achieved by
         DTL on sales to ultimate customers after taking into account marketing
         and distribution costs incurred by DTL.

         (b)      Electronic data processing, accounting services and personnel
                  and administrative charges

                  Dransfield Secretarial & Administrative Services Limited, a
         fellow subsidiary of the Company, provides various administrative
         services to the Group including electronic data processing, accounting,
         shipping, personnel, legal and general administrative services. The
         service fee charged by the fellow subsidiary is based on apportioned
         salary costs on the basis of estimated time incurred and cost of other
         resources consumed to provide these services to the Group. Effective
         fiscal year 1998/99, after the retrenchment of the Group's personnel,
         DHL allocated personnel and administrative expenses to the Group for
         expenses incurred in the management of the Group, which is based on
         apportion salary and administrative costs on the basis of estimated
         time incurred for services provided to the Group.



                                      F-18
<PAGE>   53

               DRANSFIELD CHINA PAPER CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

       (Amounts in thousands, except number of shares and per share data)



15.      RELATED PARTY TRANSACTIONS AND ARRANGEMENTS (continued)

         (c)      Storage and delivery charges

                  Victorison Logistics Limited, a fellow subsidiary of the
         Company, provides storage and delivery services to the Group at agreed
         prices, which, in the opinion of the management, approximate prices
         negotiated with third parties on an arm's length basis.

         (d)      Equipment rental

                  The equipment rental is paid to A. Dransfield & Company,
         Limited, a fellow subsidiary of the Company, at the rate equivalent to
         the depreciation of the equipment over its estimated useful live.

         (e)      Operating lease rental for land and building

                  The rental under operating leases is paid to Well Assessed
         Limited ("WAL"), a fellow subsidiary of the Company based on the actual
         floor area occupied by the Group at agreed rates, which, in the opinion
         of the management, approximate rates negotiated with third parties on
         an arm's length basis. Commencing August 1, 1998, WAL ceased the
         operating leases with the Group.


16.      FINANCIAL INSTRUMENTS

                   The carrying amount of the Company's cash and bank balances
         approximate their fair value because of the short maturity of those
         instruments. The carrying amounts of the Company's borrowings
         approximate their fair value based on the borrowing rates currently
         available for borrowings with similar terms and average maturities,
         except for the loans from holding company, which, due to their nature,
         the fair value is not determinable.

                  The carrying amount reported in the balance sheet for accounts
         receivable and accounts payable approximate their fair value.


17.      CONCENTRATION OF RISK

         Concentration of credit risk:

                    The Group's principal activities are manufacturing and
         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.

    The allowance for doubtful accounts the Group maintains is based upon the
              expected collectibility of all accounts receivable.


                                      F-19
<PAGE>   54


               DRANSFIELD CHINA PAPER CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

       (Amounts in thousands, except number of shares and per share data)



17.      CONCENTRATION OF RISK (continued)

         Current vulnerability due to certain concentrations:

                  The Group has investments in the PRC. The value of the Group's
         investment may be adversely affected by significant political, economic
         and social uncertainties in the PRC. Although the PRC government has
         been pursuing economic reform policies for the past 20 years, no
         assurance can be given that the PRC government will continue to pursue
         such policies or that such policies may not be significantly altered,
         especially in the event of a change in leadership, social or political
         disruption or unforeseen circumstances affecting the PRC's political,
         economic and social life. There is also no guarantee that the PRC
         government's pursuit of economic reforms will be consistent or
         effective.


18.      PENSION SCHEME

                  The Group is a member of a defined contribution pension scheme
         of DHL (the "Scheme"). All the full time permanent staff in Hong Kong,
         after completion of one year's service, are eligible to join the
         Scheme. The participants contribute 5% of their basic monthly salaries
         to the Scheme while the Group contributes 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 are
         charged to the profit and loss account as they become payable in
         accordance with the rules of the Scheme. When an employee leaves the
         Scheme prior to his/her interest in the Group employer contributions
         vesting fully, the ongoing contributions payable by the Group may be
         reduced by the relevant amount of forfeited contributions. Pension
         scheme expenses, net of forfeited contributions, is HK$15, HK$16 and
         HK$5 for the years ended March 31, 1997, 1998 and 1999.


19.      COMPENSATION FROM A SUPPLIER

                  The Group received a compensation of HK$1,195 (US$154) from a
         supplier during the year ended March 31, 1998 related to termination of
         distributorship of certain paper handkerchief products.



                                      F-20
<PAGE>   55

               DRANSFIELD CHINA PAPER CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

       (Amounts in thousands, except number of shares and per share data)

20.      REORGANIZATION EXPENSES

         The amount represents the costs incurred in connection with the reverse
acquisition transaction.


21.      SEGMENT REPORTING AND MAJOR SUPPLIERS

                  The Group evaluates performance and allocates resources based
         on profit or loss from operations. The accounting polices of the
         reportable segments are the same as those described in the summary of
         significant accounting policies.

                  The Group's reportable segments are business units that offer
         different products. The reportable segments are each managed separately
         because they manufacture and/or distribute distinct products with
         different production processes.

                  The Group operates in three industry segments, paper
         distribution, paper merchanting and paper manufacturing. Operations in
         paper distribution include the distribution of paper handkerchiefs.
         Operations in paper merchanting include the buying and selling of paper
         both on an indent basis and on an agency basis. The Group is in the
         process of setting up a paper manufacturing facility and operations
         have not commenced. There is no assurance that the operations, when
         commenced, will be successful. There was no turnover and operating
         results contributed from the segment of paper manufacturing because the
         paper mills were either under trial-run or under construction.

<TABLE>
<CAPTION>
                                                                     1999           1999            1998          1997
                                                                      US$            HK$             HK$           HK$
                                                                    ------        -------          -------      --------
<S>                                                                 <C>           <C>              <C>          <C>
         REVENUE
         Distribution of paper handkerchiefs
             - fellow subsidiaries                                      --             --           14,992        80,180

         Paper merchanting
             - third parties                                           621          4,812           39,639        67,064
                                                                    ------        -------          -------      --------
         Total consolidated revenues                                   621          4,812           54,631       147,244
                                                                    ======        =======          =======      ========


         DEPRECIATION AND AMORTIZATION
           EXPENSE
         Distribution of paper handkerchiefs                            --             --               14            29
         Paper merchanting                                               2             17               17            65
         Paper manufacturing                                           359          2,783              559           345
                                                                   -------       --------          -------      --------
         Total consolidated depreciation and
           amortization expense                                        361          2,800              590           439
                                                                   =======       ========          =======      ========

         PROVISION FOR INCOME TAXES
         Distribution of paper handkerchiefs                            --             --               30          (860)
         Paper merchanting                                               1              9          (   447)          551
                                                                    ------        -------          -------      --------
         Total consolidated provision for income taxes                   1              9          (   417)     (    309)
                                                                    ======        =======          =======      ========
</TABLE>


                                      F-21
<PAGE>   56

               DRANSFIELD CHINA PAPER CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

       (Amounts in thousands, except number of shares and per share data)


21.      SEGMENT REPORTING AND MAJOR SUPPLIERS (continued)

<TABLE>
<CAPTION>
                                                                     1999          1999             1998          1997
                                                                      US$           HK$              HK$           HK$
                                                                   -------       --------         --------      --------
<S>                                                                <C>           <C>              <C>           <C>
         SEGMENT LOSS
         Distribution of paper handkerchiefs                            --             --               53         5,961
         Paper merchanting                                         (   510)      (  3,957)        (    832)     (  2,926)
         Paper manufacturing                                       (   509)      (  3,947)        (  1,905)     (    591)
                                                                   -------       --------         --------      --------
         Total segment loss                                        ( 1,019)      (  7,904)        (  2,684)        2,444

         RECONCILING ITEMS
         Corporate expenses                                        (   122)      (    939)        (  1,095)     (    268)
         Reorganization expenses                                        --             --               --      (  1,815)
         Interest expense                                          (    33)      (    254)        (    537)     (  1,842)
                                                                   -------       --------         --------      --------
         Total consolidated loss before income taxes               ( 1,174)      (  9,097)        (  4,316)     (  1,481)
                                                                   =======       ========         ========      ========

         SEGMENT ASSETS
         Distribution of paper handkerchiefs                            27            211              208        22,979
         Paper merchanting                                              45            351           13,326        44,350
         Paper manufacturing                                        26,776        207,560          197,429       141,944
                                                                   -------       --------         --------      --------
         Total segment assets                                       26,848        208,122          210,963       209,273

         RECONCILING ITEM
         Corporate assets                                               28            216              314           193
                                                                   -------       --------         --------      --------
         Total consolidated assets                                  26,876        208,338          211,277       209,466
                                                                   =======       ========         ========      ========

         EXPENDITURE FOR ADDITIONS TO
           LONG-LIVED ASSETS
         Distribution of paper handkerchiefs                            --             --               --            --
         Paper merchanting                                              --             --               --             6
         Paper manufacturing                                         1,420         11,008           56,320        65,534
                                                                   -------       --------         --------      --------
         Total expenditure for additions to long-lived assets        1,420         11,008           56,320        65,540
                                                                   =======       ========         ========      ========
</TABLE>


                  There is no inter-segment sales for the three years ended
         March 31, 1999.

                  The principal assets of the Group are located in the PRC. The
         assets located elsewhere are insignificant.

                  The Group's business is conducted in Hong Kong, Macau and the
         other parts of the PRC. The sales to Macau and the other parts of the
         PRC during the three years ended March 31, 1999 were insignificant.


                                      F-22
<PAGE>   57

               DRANSFIELD CHINA PAPER CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

       (Amounts in thousands, except number of shares and per share data)


21.      SEGMENT REPORTING AND MAJOR SUPPLIERS (continued)

         MAJOR CUSTOMERS AND SUPPLIERS
                  There is no single customer who accounted for more than 10% of
         net sales for the two years ended March 31, 1998. In 1999, the Group's
         top three customers accounted for approximately 26% of total sales.

                  In 1997, 1998 and 1999, the Group's top three suppliers
         accounted for approximately 75%, 58% and 42% of total purchases,
         respectively.


22.      COMMON STOCK OPTIONS

                  On November 20, 1996, the then sole director of the Company
         adopted a stock option plan (the "Plan") whereby nontransferable
         options may be granted by the directors to employees and executive
         officers of the Company. The options are for 4-year terms but may not
         be exercised during the first year. The exercise price for each option
         shall be set by the directors but may not be less than 80 percent of
         the average or closing price 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 this plan and otherwise, shall not exceed 10 percent of the
         number of shares of common stock then outstanding. No person can be
         granted options which, if fully exercised, would result in that person
         owning more than 25 percent of the outstanding shares of common stock
         after such exercise.

                  Pursuant to the Plan, the Company granted 625,000 share
         options to its employees and directors on April 24, 1997 ("the Grant
         Date"). In 1998, 115,000 share options were canceled upon the
         termination of employment of certain employees. No share options have
         been exercised since the Grant Date. Details of the outstanding options
         at March 31, 1998 and 1999 are as follows:

<TABLE>
<CAPTION>
                                                                                                               Number of
                                                                                                     options outstanding
                                                                                                            at March 31,
         Exercise period                                                  Exercise price                   1998 and 1999
<S>                                                                     <C>                          <C>
         31 October 1998 to 23 April 2001                               US$2.8 per share                         255,000
         31 October 1999 to 23 April 2001                               US$2.8 per share                         127,500
         31 October 2000 to 23 April 2001                               US$2.8 per share                         127,500
</TABLE>

                  The Company applies Accounting Principles Board Opinion No.
         25, "Accounting for Stock issued to Employees" in accounting for the
         Plan. The compensation expense related to the share options outstanding
         at 31 March 1998 and 1999, which represented the difference between the
         exercise price and the fair market value of the Company's common stock
         at the Grant Date, should be recognized over the vesting period of 4
         years from the Grant Date. Accordingly, a compensation expense of
         HK$1,184 (US$153) and HK$939 (US$121) was recognized for the years
         ended March 31, 1998 and 1999, respectively.


                                      F-23
<PAGE>   58

               DRANSFIELD CHINA PAPER CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

       (Amounts in thousands, except number of shares and per share data)


22.      COMMON STOCK OPTIONS (continued)

                  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" ("FAS 123") and has been
         determined as if the Company had accounted for its stock options under
         the fair value method of that statement. The fair value for these
         options was estimated at the Grant Date using a Black-Scholes option
         pricing model with the following weighted-average assumptions for the
         Grant Date:

<TABLE>
<S>                                                                  <C>
         Risk-free interest rate                                     7.02%
         Dividend yield                                              Nil
         Volatility factor of the expected market price
             of the Company's common stock                           130%
         Weighted-average expected life of the options               4 years
</TABLE>

                  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
         traded options, and because changes in these subjective input
         assumptions can materially 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.

                  For the purposes of pro-forma disclosures, the estimated fair
         value of the options is amortized to expense over the options' vesting
         period. The Company's pro-forma information for the year ended March
         31, 1998 and 1999 is as follows:

<TABLE>
<CAPTION>
                                                                                     1999            1999          1998
                                                                                      US$             HK$           HK$
                                                                                    -----           ------         -----
<S>                                                                                 <C>             <C>            <C>
         Pro-forma net loss                                                         1,587           12,301         8,775
                                                                                    =====           ======         =====


         Basic and diluted net loss per share (cents)                                  10               79            70
                                                                                    =====           ======         =====
</TABLE>


23.      PREFERRED STOCK

                  The holders of the Series A convertible preferred stock are
         entitled to receive, out of surplus, a cumulative dividend at the rate
         of US$0.15 per share per annum and, after the payment of this dividend,
         they are entitled to participate in dividends set apart or paid on
         other capital stock of the Company on the same basis as the holders of
         the Company's common stock. In case of liquidation of the Company,
         these preferred stock holders shall be entitled to receive US$1.50 for
         each share of the Series A convertible preferred stock before any
         distribution of the assets of the Company to other capital stock
         holders, plus all accrued and unpaid dividends declared hereon and
         other considerations before the other capital stockholders share in the
         liquidation of the assets. This class of preferred stock is convertible
         at the option of the holders into one share of common stock of the
         Company and has equal voting rights with the common stockholders.


                                      F-24
<PAGE>   59

               DRANSFIELD CHINA PAPER CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

       (Amounts in thousands, except number of shares and per share data)


23.      PREFERRED STOCK (continued)

                  The 2.3 million shares of the Series A convertible preferred
         stock were converted to 2.3 million shares of common stock on May 30,
         1997.

                  Up to May 30, 1997, the aggregate amount of the dividends in
         arrears for the years ended March 31, 1997 and 1998 were HK$1,531
         (US$198) and HK$446 (US$58), respectively.


24.      CONTRIBUTED SURPLUS

         The amount represents a net compensation of HK$1,530 (US$198)
         from a minority shareholder, which was accounted for as a capital
         transaction in 1998, and stock compensation expense of HK$1,184(US$153)
         and HK$939(US$121) recognized for the years ended March 31, 1998 and
         1999, respectively(note 23).


25.      SUBSEQUENT EVENT (unaudited)

         On 20 July 1999, Dransfield Broadsino Paper Holdings Ltd. ("DBPHL"), a
         company which is 80% owned by the Company, entered into an agreement
         with Jiangsu Huaxi Holdings Corporation ("Jiangsu Huaxi"), the PRC
         partner of the Group's sino-foreign equity joint venture established in
         the PRC, Jiang Ying Dransfield Paper Co. Ltd. ("JYDP"). Pursuant to the
         agreement, Jiangsu Huaxi agreed to transfer to JYDP the land use rights
         relating to the land on which JYDP has built a factory, in exchange for
         the issue of 429,515 shares in the Company credited as fully paid at
         RMB19.136 per share. As a result of this agreement, it was further
         agreed that Jiangsu Huaxi will give up injecting the aforesaid land use
         rights as JYDP's capital as originally stated in the joint venture
         agreement entered between DBPHL and Jiangsu Huaxi. Accordingly, JYDP
         will become a wholly-owned subsidiary of DBPHL and the aforesaid shares
         will be issued to Jiangsu Huaxi upon the finalisation of all the
         procedures required under the PRC legislation.

         DBPHL has agreed to arrange to sell the aforesaid shares of the Company
         to be issued to Jiangsu Huaxi by 3 annual tranches (comprising 20% for
         the first year, and 40% for the second and third years, respectively)
         within 3 years from 20 July 1999 at a price not less then RMB19.136 per
         share. If the sale price does not reach RMB19.136 per share, DBPHL will
         compensate Jiangsu Huaxi the difference arising therefrom.



                                      F-25
<PAGE>   60
                                   SIGNATURES

         Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, the Registrant certifies that it meets all of the requirements for
filing on Form 20-F and has duly caused this annual report to be signed on its
behalf by the undersigned, thereunto duly authorized.

                                            DRANSFIELD CHINA PAPER CORPORATION



Date:  September 27, 1999                   By /s/ Horace Yao Yee Cheong
                                               --------------------------------
                                               Horace Yao Yee Cheong,
                                               Chief Executive Officer


                                      34
<PAGE>   61

                               INDEX TO EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT
NUMBER                   DESCRIPTION
-------                  -----------
<S>            <C>
  2            Two agreements of January 20, 1999 between Jiangmen Sugar Cane
               Chemical Factory (Group) Co. Ltd. and Guangdong Dransfield
               Paper Co. Ltd. relating to the Jingmen Sugarcane Chemical
               Factory's paper mill.
</TABLE>