<PAGE> 1
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
<TABLE>
<S> <C>
/ / Preliminary Proxy Statement / / Confidential, for Use of the Commission
Only (as permitted by Rule 14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
</TABLE>
CHINA RESOURCES DEVELOPMENT, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
N/A
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/X/ No fee required.
/ / $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), or 14a-6(i)(2) or
Item 22(a)(2) of Schedule 14A.
/ / $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
<PAGE> 2
CHINA RESOURCES DEVELOPMENT, INC.
23/F. OFFICE TOWER, CONVENTION PLAZA
1 HARBOUR ROAD, WANCHAI, HONG KONG
-----------------------------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD DECEMBER 30, 1996
To the Shareholders:
Notice is hereby given that an Annual Meeting of Shareholders (the
"Annual Meeting") of CHINA RESOURCES DEVELOPMENT, INC. (the "Company"), will be
held at the offices of Worlder International Company Limited, 21st Floor, Great
Eagle Centre, No. 23 Harbour Road, Hong Kong, on December 30, 1996, at 3:00
p.m., local time, for the following purposes:
1. To consider and vote upon a proposal by the Board of Directors
to effect a one-for-ten reverse stock split of the Company's
common stock, par value $0.001 per share;
2. To consider and vote upon an amendment to the Articles of
Incorporation, as revised, of the Company to increase the
share ownership requirement for the calling of special
meetings of the shareholders;
3. To consider and vote upon an amendment to the Articles of
Incorporation, as revised, of the Company to establish three
classes of directors and clarify provisions affecting officers
and directors;
4. To consider and vote upon an amendment to the By-Laws of the
Company to allow the Board of Directors to amend the By-Laws;
5. To consider and vote upon an amendment to the Company's 1995
Stock Option Plan to increase the number of shares of Common
Stock subject thereto and to decrease the required holding
period for non-qualified stock options;
6. To elect directors;
7. To consider and vote upon the ratification of the appointment
of Ernst & Young as the Company's independent accountants for
the fiscal year ending December 31, 1996; and
8. To transact such other business as may properly come before
the Annual Meeting and any adjournment or postponement
thereof.
Shareholders of record at the close of business on December 13, 1996,
are entitled to notice of and to vote at the Annual Meeting or any adjournment
or postponement thereof. The Company's annual report on Form 10-K for the year
ended December 31, 1995, is enclosed for your convenience.
Please sign and date the enclosed proxy card and return it promptly in
the accompanying envelope (no postage required if mailed in the United States)
to ensure that your shares will be represented at the Annual Meeting.
<PAGE> 3
If you attend the Annual Meeting, you may vote your shares in person even if
you have previously submitted a proxy.
By Order of the Board of Directors,
/s/ Zhang Yibing
-------------------------------------
Zhang Yibing
December 16, 1996 Secretary
-2-
<PAGE> 4
CHINA RESOURCES DEVELOPMENT, INC.
23/F. OFFICE TOWER, CONVENTION PLAZA
1 HARBOUR ROAD, WANCHAI, HONG KONG
----------------------
PROXY STATEMENT FOR ANNUAL MEETING OF
SHAREHOLDERS TO BE HELD ON DECEMBER 30, 1996
This proxy statement and the accompanying proxy card are being
furnished in connection with the solicitation of proxies by the Board of
Directors of China Resources Development, Inc., a Nevada corporation (the
"Company"), from holders of the Company's outstanding shares of Common Stock,
par value $0.001 per share (the "Common Stock") for the Annual Meeting of
Shareholders to be held December 30, 1996, for the purposes set forth in the
accompanying notice (the "Annual Meeting"). The Company will bear the costs of
soliciting proxies from its shareholders. In addition to soliciting proxies by
mail, directors, officers and employees of the Company, without receiving
additional compensation therefor, may solicit proxies by telephone, by telegram
or in person. Arrangements will also be made with brokerage firms and other
custodians, nominees and fiduciaries to forward solicitation materials to the
beneficial owners of Common Stock held of record by such persons, and the
Company will reimburse such brokerage firms, custodians, nominees and
fiduciaries for reasonable out-of-pocket expenses incurred by them in
connection therewith. This proxy statement is first being mailed to
shareholders of the Company on or about December 16, 1996.
VOTING AT THE MEETING
At the close of business on December 13, 1996, the record date for
determining shareholders entitled to notice of and to vote at the Annual
Meeting (the "Record Date"), there were outstanding and entitled to vote
approximately 89,789,968 shares of Common Stock. All of the outstanding
shares of Common Stock are entitled to vote on all matters which properly come
before the annual meeting, and each shareholder will be entitled to one vote
for each share of Common Stock held.
Each proxy that is properly signed and received prior to the
Annual Meeting will, unless revoked, be voted in accordance with the
instructions on such proxy. If no instruction is indicated, the shares will be
voted FOR approval of the reverse stock split, FOR adoption of two amendments
to the Articles of Incorporation, as amended, of the Company (the "Articles of
Incorporation"), FOR adoption of the amendment to the By-Laws of the Company
(the "By-Laws"), FOR the adoption of an amendment to the Company's 1995 Stock
Option Plan (the "Plan"), FOR the election of the nominees for director listed
in this proxy statement, and FOR ratification of the appointment of Ernst &
Young. A shareholder who has given a proxy may revoke such proxy at any time
before it is voted at the Annual Meeting by delivering a written notice of
revocation or duly executed proxy bearing a later date to the Secretary of the
Company or by attending the meeting and voting in person.
A quorum of shareholders is necessary to take action at the Annual
Meeting. A majority of the outstanding shares of Common Stock of the Company,
represented in person or by proxy, will constitute a quorum. Votes cast by
proxy or in person at the Annual Meeting will be tabulated by the inspectors of
election appointed for the Annual Meeting. The inspectors of election will
determine whether or not a quorum is present at the Annual Meeting. The
inspectors of election will treat abstentions as shares of Common Stock that
are present and entitled to vote for purposes of determining the presence of a
quorum. Under certain circumstances, a broker or other nominee may have
discretionary authority to vote certain shares of Common Stock if instructions
have not been received from the beneficial owner or other person entitled to
vote. If a broker or nominee indicates on the proxy that it does not have
instructions or discretionary authority to vote certain shares of Common Stock
on a particular matter, those
-1-
<PAGE> 5
shares will not be considered as present for purposes of determining whether a
quorum is present or whether a matter has been approved.
The nominees for director who receive the greatest number of votes
cast in person or by proxy at the Annual Meeting shall be elected directors of
the Company. The vote required for adoption of the other proposals herein is
the affirmative vote of a majority of the shares of Common Stock present in
person or represented by proxy at the Annual Meeting; and, for purposes of
determining shareholder approval of such proposals, abstentions will be treated
as shares of Common Stock voted against adoption of such proposals.
CONVENTIONS
Unless otherwise specified, all references in this report to "U.S.
Dollars," "Dollars," "U.S.$," or "$" are to United States dollars; and all
references to "Renminbi" or "Rmb" or "yuan" are to Renminbi yuan, which is the
lawful currency of the People's Republic of China ("China" or "PRC"). The
Company and Billion Luck maintain their accounts in U.S. Dollars and Hong Kong
Dollars, respectively. HARC and the Operating Subsidiaries maintain their
accounts in Renminbi yuan. The financial statements of the Company and its
subsidiaries are prepared in Renminbi. Translations of amounts from Renminbi to
U.S. Dollars are for the convenience of the reader. Unless otherwise indicated,
any translations from Renminbi to U.S. Dollars or from U.S. Dollars to Renminbi
have been made at the single rate of exchange as quoted by the People's Bank of
China (the "PBOC Rate") on September 30, 1996, which was U.S.$1.00 = Rmb8.30.
The Renminbi is not freely convertible into foreign currencies and the
quotation of exchange rates does not imply convertibility of Renminbi into U.S.
Dollars or other currencies. All foreign exchange transactions take place
either through the Bank of China or other banks authorized to buy and sell
foreign currencies at the exchange rates quoted by the People's Bank of China.
No representation is made that the Renminbi or U.S. Dollar amounts referred to
herein could have been or could be converted into U.S. Dollars or Renminbi, as
the case may be, at the PBOC Rate or at all.
References to "Billion Luck" refer to Billion Luck Company Ltd., a
British Virgin Islands company, which is a wholly-owned subsidiary of the
Company.
References to "Company" and "Registrant" are to China Resources
Development, Inc., and include, unless the context requires otherwise, the
operations of Billion Luck, HARC, First Supply, and Second Supply (all as
hereinafter defined).
References to "Farming Bureau" are to the Hainan Agricultural
Reclamation General Company, a division of the Ministry of Agriculture, the PRC
government agency responsible for matters relating to agriculture.
References to "First Supply" are to First Goods And Materials Supply
And Sales Corporation, a company organized in the PRC and a wholly-owned
subsidiary of HARC.
References to "Guilinyang Farm" are to Hainan Province Guilinyang
State Farm, a PRC entity which is owned and controlled by the Farming Bureau.
References to "Hainan" are to Hainan Province of the PRC.
References to "Hainan State Farms" are to the rubber farms in Hainan
controlled by the Farming Bureau.
References to "HARC" are to Hainan Agricultural Resources Company
Limited, a company organized in the PRC, whose capital is owned 56% by Billion
Luck, 39% by the Farming Bureau and 5% by Guilinyang Farm.
References to "Operating Subsidiaries" are to the consolidated
operations, assets and/or activities, as the context indicates, of First Supply
and Second Supply.
References to the "PRC" or "China" are to the People's Republic of
China and include all territory claimed by or under the control of the Central
Government, except Hong Kong, Macau, and Taiwan.
References to "Second Supply" are to Second Goods And Materials Supply
And Sales Corporation, a company organized in the PRC and a wholly-owned
subsidiary of HARC.
References to "Tons" are to metric tons.
-2-
<PAGE> 6
BENEFICIAL OWNERSHIP OF CERTAIN SHAREHOLDERS
BENEFICIAL OWNERS OF MORE THAN 5%
OF THE COMPANY'S COMMON STOCK
The following table sets forth, to the knowledge of management, each
person or entity who is the beneficial owner of more than 5% of the outstanding
shares of the Company's Common Stock outstanding as of December 13, 1996, the
number of shares owned by each such person and the percentage of the
outstanding shares represented thereby.
<TABLE>
<CAPTION>
Amount and
Name and Address Nature of Percent
of Beneficial Owner Beneficial Ownership (1) of Class
=================== ======================= ========
<S> <C> <C>
Everbright Finance & Investment 35,348,000 Common Stock 39.37%
Co. Limited(2)
23/F., Office Tower
Convention Plaza
1 Harbour Road
Wanchai, Hong Kong
</TABLE>
(1) The inclusion herein of any shares deemed beneficially owned does not
constitute an admission of beneficial ownership of these shares.
(2) Of the 35,348,000 shares of Common Stock indicated, Everbright Finance &
Investment Co. Limited ("Everbright") directly owns 33,998,000 shares, and the
remaining 1,350,000 shares represent one-half of the 2,700,000 shares of Common
Stock owned by Silverich Limited, which is one-half owned by Everbright and
one-half owned by Worlder International Company Limited.
SHARE OWNERSHIP OF OFFICERS AND DIRECTORS
The following table sets forth certain information with respect to the
beneficial ownership of Common Stock as of December 13, 1996, by (i) each
director of the Company, (ii) each executive officer of the Company named in
the summary compensation table, and (iii) all directors and executive officers
of the Company as a group. All information with respect to beneficial ownership
has been furnished by the respective director or executive officer (in the case
of shares beneficially owned by each of them). Unless otherwise indicated in a
footnote, each stockholder possesses sole voting and investment power with
respect to the shares indicated as beneficially owned.
-3-
<PAGE> 7
<TABLE>
<CAPTION>
Amount and
Name of Nature of Percent of
Beneficial Owner Beneficial Ownership (1) Class
---------------- ------------------------ ----------
<S> <C> <C>
Yang Jiangang -0- N/A
Li Shunxing -0- N/A
Wang Faren -0- N/A
Yiu Yat Hung 2,160,000 Common Stock(2) 2.41%
Han Jian Zhun -0-(3) N/A
Tam Cheuk Ho -0-(4) N/A
Zhang Yibing -0- N/A
Li Fei Lie -0-(5) N/A
Wong Wah On 432,000 Common Stock(6) 0.48%
All executive officers 2,592,000 Common Stock 2.89%
and directors as a group
</TABLE>
(1) The inclusion herein of any shares deemed beneficially owned does not
constitute an admission of beneficial ownership of these shares.
(2) Hong Wah Investment Holdings Limited owns 2,160,000 shares of Common Stock.
Hong Wah Investment Holdings Limited is a Hong Kong company of which Yiu Yat
Hung, the Vice Chairman of the Board of Directors of the Company, is a
director. Additionally, Hong Wah Investment Holdings Limited is beneficially
owned by Yiu Yat On, a brother of Yiu Yat Hung. In addition, Mr. Yiu was
granted options to purchase 6,000 shares of Common Stock under the Company's
Stock Option Plan as described in Proposal 5 below.
(3) Han Jian Zhun was granted options to purchase 6,000 shares of Common Stock
under the Company's Stock Option Plan as described in Proposal 5 below.
(4) Tam Cheuk Ho was granted options to purchase 6,000 shares of Common Stock
under the Company's Stock Option Plan as described in Proposal 5 below.
(5) Li Fei Lie was granted options to purchase 100,000 shares of Common Stock
under the Company's Stock Option Plan as described under in Proposal 5 below.
(6) Brender Services Limited owns 432,000 shares of Common Stock. Brender
Services Limited is beneficially owned by Wong Wah On, the Financial Controller
of the Company. In addition, Brender was granted options to purchase 100,000
shares of Common Stock under the Company's Stock Option Plan, and Mr. Wong was
granted options to purchase 6,000 shares of Common Stock under the Plan, as
described in Proposal 5 below.
(6) Brender Services limited owns 432,000 shares of Common Stock. Brender
Services Limited is beneficially owned by Wong Wah On, the Financial Controller
of the Company. In addition, Brender was granted options to purchase 100,000
shares of Common Stock under the Company's stock Option Plan, and Mr. Wong was
granted options to purchase 6,000 shares of Common Stock under the Plan, as
described under "Stock Options" below.
-4-
<PAGE> 8
FINANCIAL INFORMATION
The following financial information and management's discussion and
analysis of financial condition and results of operations are excerpted from the
Company's Form 10-Q quarterly report for the quarterly period ended September
30, 1996. This information supplements the information contained in the
Company's form 10-K annual report for the fiscal year ended December 31, 1995, a
copy of which is provided herewith and incorporated herein by reference.
FINANCIAL STATEMENTS.
CHINA RESOURCES DEVELOPMENT, INC., AND SUBSIDIARIES
CONDENSED CONSOLIDATED INCOME STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(Amounts in thousands, except share and per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
Note ------------------------------------------- ---------------------------------------------
1996 1995 1996 1996 1995 1996
RMB RMB US$ RMB RMB US$
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
SALES 486,788 709,361 58,649 1,282,507 1,307,500 154,519
COST OF SALES (445,430) (685,638) (53,666) (1,165,224) (1,255,379) (140,388)
---------- ---------- ---------- ---------- ---------- ----------
GROSS PROFIT 41,358 23,723 4,983 117,283 52,121 14,131
DEPRECIATION OF
FIXED ASSETS (484) (625) (58) (1,692) (1,817) (204)
SELLING AND
ADMINISTRATIVE EXPENSES (14,132) (10,962) (1,703) (39,305) (33,690) (4,736)
---------- ---------- ---------- ---------- ---------- ----------
OPERATING INCOME 26,742 12,136 3,222 76,286 16,614 9,191
FINANCIAL INCOME/
(EXPENSES), NET (10,122) (975) (1,220) (31,798) (3,388) (3,831)
OTHER INCOME/
(LOSSES), NET 11,127 2,488 1,341 15,370 17,940 1,852
---------- ---------- ---------- ---------- ---------- ----------
INCOME BEFORE
INCOME TAXES 27,747 13,649 3,343 59,858 31,166 7,212
INCOME TAXES (2,335) (2,399) (281) (7,912) (5,011) (953)
---------- ---------- ---------- ---------- ---------- ----------
NET INCOME BEFORE
MINORITY INTERESTS 25,412 11,250 3,062 51,946 26,155 6,259
MINORITY INTERESTS (9,807) (6,106) (1,182) (23,208) (12,913) (2,796)
---------- ---------- ---------- ---------- ---------- ----------
NET INCOME FOR THE
PERIOD 15,605 5,144 1,880 28,738 13,242 3,463
========== ========== ========== ========== ========== ==========
PRIMARY EARNINGS 2
PER SHARE 0.531 0.429 0.064 0.978 1.104 0.118
========== ========== ========== ========== ========== ==========
FULLY DILUTED 2
EARNINGS PER SHARE 0.493 0.429 0.059 0.908 1.104 0.109
========== ========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
-5-
<PAGE> 9
CHINA RESOURCES DEVELOPMENT, INC., AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 1996 AND DECEMBER 31, 1995
(Amounts in thousands)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996 December 31, 1995 September 30, 1996
------------------ ----------------- ------------------
RMB RMB US$
NOTES (UNAUDITED) (audited) (unaudited)
ASSETS
CURRENT ASSETS
<S> <C> <C> <C> <C>
Cash and cash equivalents 80,670 56,942 9,719
Trade receivables 135,475 31,991 16,322
Other receivables, deposits and 135,671 52,871 16,346
prepayments
Inventories 3 185,350 103,776 22,332
Amounts due from related 253,871 288,503 30,587
companies
Amount due from Farming 48,548 80,427 5,849
Bureau
Other current assets --- 19,448 ---
-------- ------- -------
TOTAL CURRENT ASSETS 839,585 633,958 101,155
FIXED ASSETS 4 21,788 21,491 2,625
INVESTMENTS 12,163 11,963 1,465
GOODWILL 1,055 1,076 127
------- ------- ------
TOTAL ASSETS 874,591 668,488 105,372
======= ======= =======
LIABILITIES AND
SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Bank loans 292,560 293,000 35,248
Amounts due to related companies 35,709 22,654 4,302
Amounts due to shareholders 299 15,727 36
Accounts payable 149,167 39,876 17,972
Income taxes payable 13,873 10,265 1,672
Other payables and accrued 78,748 21,533 9,488
liabilities
Short term advances -- 86,917 --
------- ------- -----
TOTAL CURRENT 570,356 489,972 68,718
LIABILITIES
</TABLE>
-6-
<PAGE> 10
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996 December 31, 1995 September 30, 1996
------------------ ----------------- ------------------
RMB RMB US$
NOTES (UNAUDITED) (audited) (unaudited)
<S> <C> <C> <C> <C>
MINORITY INTERESTS 97,111 74,067 11,700
------- ------- -------
TOTAL LIABILITIES 667,467 564,039 80,418
======= ======= ======
SHAREHOLDERS' EQUITY
Common Stock, US$0.001
par value: Authorized -
200,000,000 shares in
1996 and 1995 Issued and
outstanding - 76,938,640
shares in 1996 and
12,000,000 shares in
1995 641 101 77
Preferred stock,
authorized - 10,000,000
shares in 1996 and 1995:
Series A preferred
stock, US$1 par value:
Authorized, issued and
outstanding - 6,400,000
shares in 1995 -- 53,930 --
Series B convertible
preferred stock,
US$0.001 par value:
Authorized - 2,500
shares in 1996 and 1995.
Issued and outstanding -
300 shares in 1996 and
370 shares in 1995 -- --- __
Additional paid-in capital 148,288 20,961 17,866
Reserves 8,930 8,930 1,075
Retained earnings 49,265 20,527 5,936
------- ------- -------
TOTAL SHAREHOLDERS' 207,124 104,449 24,954
------- ------- -------
EQUITY
TOTAL LIABILITIES AND 874,591 668,488 105,372
SHAREHOLDERS' EQUITY ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
-7-
<PAGE> 11
CHINA RESOURCES DEVELOPMENT, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Amounts in thousands, except share and per share data)
<TABLE>
<CAPTION>
Series B
Series A Convertible Additional
Common Preferred Preferred Paid-In Retained
Stock Stock Stock Capital Reserves Earnings Total
RMB RMB RMB RMB RMB RMB RMB
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 101 -- -- 1,407 2,657 7,625 11,790
31, 1994
Issuance of 6,400,000 -- 53,930 -- -- -- -- 53,930
shares of Series A
preferred stock
Issuance of 370 shares -- -- -- 19,554 -- -- 19,554
of Series B preferred
stock, net of share
issuance costs
Net income -- -- -- -- -- 19,175 19,175
Transfer to reserves -- -- -- -- 6,273 (6,273) --
-------- -------- --------- --------- -------- ------ -------
Balance at December 101 53,930 -- 20,961 8,930 20,527 104,449
31, 1995
Issuance of 1,283 shares -- -- -- 73,937 -- -- 73,937
of Series B convertible
preferred stock, net of
shares issuance costs
Issuance of 32,938,640 274 -- -- (274) -- -- --
shares of common stock
pursuant to the
conversion of 1,353
shares of series B
convertible preferred
stock
Exchange of 6,400,000 266 (53,930) -- 53,664 -- -- --
shares of Series A
preferred stock into
32,000,000 shares of
restricted common stock
Net income -- -- -- -- -- 28,738 28,738
-------- -------- -------- ------- -------- ------- --------
Balance at September
30, 1996 641 -- -- 148,288 8,930 49,265 207,124
======== ======== ======== ======== ======== ======= ========
</TABLE>
-8-
<PAGE> 12
CHINA RESOURCES DEVELOPMENT, INC., AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(Amounts in thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------------------------------
1996 1995 1996
RMB RMB US$
(UNAUDITED) (UNAUDITED) (UNAUDITED)
CASH FLOWS FROM OPERATING
ACTIVITIES:
<S> <C> <C> <C>
Net income 28,738 13,242 3,462
Adjustments to reconcile net income to net
cash provided by operating activities:
Minority interests 23,208 12,913 2,796
Depreciation and amortization 1,713 1,838 206
Loss on disposal of fixed assets 5 466 1
Decrease/(increase) in assets:
Trade receivables (103,484) (7,500) (12,468)
Other receivables, deposits and prepayments (82,800) (23,731) (9,976)
Inventories (81,574) 16,589 (9,828)
Amount due from Farming Bureau 31,879 (17,772) 3,841
Amounts due from related companies 34,632 (12,083) 4,173
Other current assets 19,448 -- 2,343
Increase/(decrease) in liabilities:
Amounts due to related companies 13,055 (2,129) 1,573
Accounts payable 109,291 11,776 13,168
Income taxes payable 3,608 4,801 435
Other payables and accrued liabilities 57,215 6,620 6,893
Amounts due to Farming Bureau -- (14,978) --
--------- --------- --------
Net cash provided by / (used in) operating
activities 54,934 (9,948) 6,619
--------- --------- --------
CASH FLOWS PROVIDED BY/(USED IN)
INVESTING ACTIVITIES:
Purchases of fixed assets (1,994) (3,530) (240)
Purchases of investments (200) (61) (24)
Reduction of minority interests (164) -- (20)
Additions to construction in progress -- (1,410) --
Proceeds from sale of fixed assets -- 1,500 --
-------- --------- --------
Net cash used in investing activities (2,358) (3,501) (284)
-------- --------- --------
</TABLE>
-9-
<PAGE> 13
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------------------------------
1996 1995 1996
RMB RMB US$
(UNAUDITED) (UNAUDITED) (UNAUDITED)
CASH FLOWS PROVIDED BY/(USED IN)
FINANCING ACTIVITIES:
<S> <C> <C> <C>
Issue of share capital less share offering costs 73,937 -- 8,908
Loans from shareholders -- 4,170 --
Repayment of loans to shareholders (15,428) -- (1,859)
Repayments of bank borrowings (440) (8,993) (53)
Cash remitted to Farming Bureau -- (1,780) --
Short term advances (86,917) -- (10,472)
Loans to related companies -- (22,573) --
Cash from repayment of loans by
related companies -- 36,635 --
-------- -------- --------
Net cash provided by/(used in) financing activities (28,848) 7,459 (3,476)
-------- -------- --------
NET INCREASE/(DECREASE) IN CASH
AND CASH EQUIVALENTS: 23,728 (5,990) 2,859
Cash and cash equivalents, at beginning of period 56,942 69,157 6,860
-------- --------- --------
Cash and cash equivalents, at end of period 80,670 63,167 9,719
======== ========= ========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
-10-
<PAGE> 14
CHINA RESOURCES DEVELOPMENT, INC., AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands)
1. BASIS OF PRESENTATION:
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions
to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the nine-month period ended
September 30, 1996, is not necessarily indicative of the results that
may be expected for the year ending December 31, 1996. The unaudited
condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and footnotes
thereto included in the Company's annual report on Form 10-K for the
year ended December 31, 1995.
2. EARNINGS PER SHARE:
The computation of primary earnings per share for the three months and
nine months ended September 30, 1996, are based on the weighted average
number of common stock outstanding after giving effect to dilutive
stock options and series B convertible preferred stock, which are
included as common share equivalents using the treasury stock method
and assumed to be converted to common stock, respectively. The average
number of shares of common stock outstanding excludes the 32,000,000
shares of common stock with restricted rights in receiving dividends or
participating in the event of liquidation of the Company, which might
otherwise be payable to holders of the Company's capital stock. The
shares of restricted common stock were issued pursuant to an Exchange
Agreement dated July 22, 1996. The number of shares used in computing
the primary earnings per share and fully diluted earnings per share are
29,395,885 and 31,635,071, respectively.
For the three months and nine months ended September 30, 1995, primary
earnings per share and fully diluted earnings per share are based on an
aggregate of 12,000,000 shares of common stock outstanding.
3. INVENTORIES:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
--------- ---------
RMB RMB
(unaudited) (audited)
<S> <C> <C>
Inventories comprise:
Finished goods 185,350 103,776
========= =========
</TABLE>
4. FIXED ASSETS:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
RMB RMB
(unaudited) (audited)
Cost:
<S> <C> <C>
Buildings 5,739 5,739
Plant, machinery and equipment 11,926 10,267
Transportation vehicles and equipment 8,772 8,448
------- -------
26,437 24,454
------- -------
</TABLE>
-11-
<PAGE> 15
Accumulated depreciation:
Buildings 941 607
Plant, machinery and equipment 2,235 1,563
Transportation vehicles and equipment 1,473 793
------- -------
4,649 2,963
------- -------
Net book value 21,788 21,491
======= =======
5. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1996 1995
RMB RMB
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Cash paid during the period for interest expenses 19,959 31,191
====== ======
</TABLE>
-12-
<PAGE> 16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATION
RESULTS OF OPERATIONS
The following table shows the selected unaudited condensed consolidated
income statements data of the Company and its subsidiaries for the three months
and nine months ended September 30, 1995 and 1996. The data should be read in
conjunction with the unaudited Condensed Consolidated Financial Statements of
the Company and related Notes thereto:
(Amounts in thousands)
<TABLE>
<CAPTION>
Three months Nine months
ended ended
September 30, September 30,
------------- -------------
1996 1995 1996 1995
RMB RMB RMB RNB
Sales:
<S> <C> <C> <C> <C>
Distribution of natural rubber
Procurement of materials and 390,544 668,209 977,964 1,187,236
supplies 96,244 41,152 304,543 120,264
-------- ---------- ---------- ----------
486,788 709,361 1,282,507 1,307,500
-------- ---------- ---------- ----------
Gross profit 41,358 23,723 117,283 52,121
Gross profit margin (%) 8.50 3.34 9.14 3.99
Income before income taxes 27,747 13,649 59,858 31,166
Income taxes (2,335) (2,399) (7,912) (5,011)
-------- ---------- ---------- ----------
Net income 25,412 11,250 51,946 26,155
Minority interests (9,807) (6,106) (23,208) (12,913)
-------- ---------- ---------- ----------
Net income after minority 15,605 5,144 28,738 13,242
interests ======== ========== ========== ==========
</TABLE>
-13-
<PAGE> 17
SALES AND GROSS PROFIT
The Company's total sales for the nine months ended September 30, 1996,
were comparable to those of 1995. Of the total sales, the natural rubber sales
decreased by 17.6% to Rmb978 million from Rmb1,187 million for the corresponding
period in last year. This decrease was offset by the increase in procurement of
materials and supplies by 153% to Rmb305 million from Rmb120 million for the
corresponding period in last year. The decrease in natural rubber sales was
mainly due to the decrease in the average unit selling price from Rmb13,400 in
1995 to Rmb12,200 in 1996. In addition, the unit sales of rubber for the nine
months ended September 30, 1996, decreased by 5.7% from the corresponding period
in fiscal 1995 because more inventories were held as of September 30, 1996, in
anticipation of the increase in selling price in the fourth quarter when there
is less rubber output. Following the completion of the Company's offshore
private placements on March 8 and July 8, 1996, the net proceeds raised from the
offering were invested into the Company's subsidiaries in Hainan as working
capital to expand the distribution operations. The Company has expanded into the
trading of other agricultural products, such as coffee beans, and the
corresponding sales revenue was included under the procurement of materials and
supplies. The total sales of such agricultural products for the nine months
ended September 30, 1996, amounted to approximately Rmb167 million, with a gross
profit of approximately Rmb33 million, or a gross profit margin of 20%. The
overall gross profit margin also increased significantly from 3.99% in fiscal
1995 to 9.14% in fiscal 1996, which was attributable to the high gross profit
margin from the trading of agricultural products and the purchase discounts
received for rubber distribution.
For the third quarter of fiscal 1996, total sales decreased by 31% to
Rmb487 million from Rmb709 million for the corresponding period in fiscal 1995.
The decrease was due to more rubber inventories being held as of September 30,
1996, in anticipation of the increase in selling price in the fourth quarter, as
previously discussed. The overall gross profit margin also increased to 8.50%
from 3.34% for the corresponding period in fiscal 1995 due to the reasons
mentioned above.
SELLING AND ADMINISTRATIVE EXPENSES
Selling and administrative expenses increased by 16.7%, or Rmb5.6
million, for the nine months ended September 30, 1996, compared to the same
period in fiscal 1995. The increase was mainly due to increases in salaries and
staff welfare expenses, and additional selling expenses were incurred for the
distribution of the agricultural products.
FINANCIAL EXPENSES, NET
The net financial expenses increased by Rmb28.4 million, from Rmb3.4
million for the nine months ended September 30, 1995, to Rmb31.8 million for the
corresponding period in 1996. The net financial expenses for the third quarter
of fiscal 1996 also increased by Rmb9.1 million as compared with the
corresponding quarter in last year. The increase was due to the fact that less
interest income was received from related companies as a result of the overall
decrease in advances to related companies in fiscal 1996.
OTHER INCOME/(LOSSES), NET
Other income/(losses) mainly represented income from long term
investments, rental income and profits or losses on trading of rubber futures
contracts. The Rmb2.6 million decrease in net income, from Rmb17.9 million
for the nine months ended September 30, 1995, to Rmb15.4 million for the same
period in fiscal 1996, was mainly due to less profits on the trading of rubber
futures contracts in fiscal 1996 compared to those of fiscal 1995.
-14-
<PAGE> 18
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary liquidity needs are to fund accounts receivable,
inventories, rubber purchase deposits and to expand business operations. The
Company has financed its working capital requirements through a combination of
internally generated cash, short term bank borrowing and issuance of share
capital.
Net cash provided by/(used in) operating activities was Rmb54.9 million
and (Rmb9.9 million) for the nine months ended September 30, 1996 and 1995,
respectively. Net cash flows from the Operating Subsidiaries' operating
activities are attributable to the Operating Subsidiaries' income and changes in
operating assets and liabilities.
During the nine months ended September 30, 1996, the Company issued
1,283 shares of series B convertible preferred stock at US$10,000 per share,
with a gross proceeds of US$12.83 million. As of September 30, 1996, 300 shares
of series B convertible preferred stock were still outstanding. (As of December
13, 1996, no shares of series B convertible preferred stock were still
outstanding.)
There has been no other significant change in financial condition and
liquidity since the fiscal year ended December 31, 1995. The Company believes
that the net proceeds from its capital raising efforts, together with internally
generated funds, will be sufficient to satisfy its anticipated working capital
needs for at least the next 12 months.
-15-
<PAGE> 19
CERTAIN FINANCING ACTIVITIES
On March 8, 1996, the Company completed a private offering of shares
of its Series B Convertible Preferred stock, par value $0.001 per share (the
"Shares"), raising gross proceeds of $12,530,000.00. On July 8, 1996, the
Company completed another private offering of Shares, raising gross proceeds of
$4,000,000.00. The offerings were conducted outside of the United States in
reliance upon the exemption from registration provided by Regulation S,
promulgated under the Securities Act of 1933, as amended (the "Act"). The terms
of the Shares are set forth in the Certificate of Designation filed by the
Company with the Secretary of State of Nevada on December 13, 1995, as follows:
Each share of Series B Convertible Preferred Stock shall be
convertible into shares of the Corporation's Common Stock, $.001 par
value (the "Common Stock"), at any time during the two-year period
commencing on the 45th day following the date of the closing of the
sale of such share (the "Conversion Period"), upon delivery to the
Corporation by the record holder thereof of a notice of conversion
(the "Conversion Notice") and the surrender to the Corporation at its
corporate offices at 2440 South Progress Drive, Salt Lake City, Utah
84119, or at any other place designated in writing by the Corporation,
of the certificates for shares of Series B Convertible Preferred Stock
to be so converted. The number of shares of Common Stock issuable upon
conversion of shares of Series B Convertible Preferred Stock shall
equal the number of shares of Series B Convertible Preferred Stock to
be converted, multiplied by $10,000 per share (the "Share Price"),
divided by the Conversion Factor (as hereafter defined). "Conversion
Factor" means the lesser of (a) the product derived by multiplying (i)
the average closing bid price of the Common Stock on the electronic
inter-dealer quotation system operated by Nasdaq, Inc., a subsidiary
of the National Association of Securities Dealers, Inc. (the "NASDAQ
System"), for the five consecutive trading days immediately preceding
the date of the delivery of the Conversion Notice to the Corporation
by (ii) 69%, or (b) the product derived by multiplying (i) the average
closing bid price of the Common Stock on the NASDAQ System for the
five consecutive trading days immediately preceding the date of the
delivery of the Subscription Agreement for the related shares of
Series B Convertible Preferred Stock to the Corporation by (ii) 85%.
Upon the expiration of the Conversion Period, all remaining issued and
outstanding shares of Series B Convertible Preferred Stock shall be
converted as of such expiration date into the appropriate number of
shares of Common Stock in accordance with the above-referenced
formula.
None of the shares of Series B Convertible Preferred Stock shall
entitle the holder thereof to any voting rights whatsoever in
connection therewith. The Series B Convertible Preferred Stock has no
preemptive or other subscription rights and is not subject to any
future calls or assessments. There are no redemption or sinking fund
provisions applicable to shares of Series B Convertible Preferred
Stock, and holders of Series B Convertible Preferred Stock have no
rights whatsoever to dividends or to distributions upon liquidation or
dissolution of the Company.
The Corporation may, at its option and in its sole discretion, issue
any other class or series of preferred stock with rights and
preferences superior to or in parity with the rights and preferences
attributable to the Series B Convertible Preferred Stock.
The Shares have not been and will not be registered under the Act and
may not be offered or sold in the United States absent registration or an
applicable exemption from registration requirements. The Company intends to
utilize the funds raised through the offering to finance the expansion of its
rubber distribution operations in the People's Republic of China, to repay
short term debt and to provide working capital for distribution and other
operations. Since the date of the financial information above, all of the Shares
have now been converted into shares of Common Stock.
-16-
<PAGE> 20
PROPOSAL 1 - BOARD OF DIRECTORS PROPOSAL TO EFFECT A
ONE-FOR-TEN REVERSE STOCK SPLIT OF THE COMPANY'S COMMON STOCK
The Board of Directors of the Company has approved a resolution to
effect a one-for-ten reverse split of the Company's issued and outstanding
shares of Common Stock (the "Reverse Stock Split"). If the Reverse Stock Split
is approved by shareholders, the Board of Directors will determine the date on
which the Reverse Stock Split will become effective. Each share of Common Stock
issued and outstanding immediately prior to that effective date will be
reclassified as and changed into one-tenth of one share of Common Stock.
The principal effect of the Reverse Stock Split will be to decrease
the number of outstanding shares of Common Stock from 89,789,968 (as of
December 13, 1996) to approximately 8,978,997 shares (assuming that no
additional shares have been issued or retired subsequent to December 13, 1996).
The Common Stock issued pursuant to the Reverse Stock Split will be fully paid
and nonassessable. The respective relative voting rights and other rights that
accompany the Common Stock will not be altered by the Reverse Stock Split
(other than as a result of payment of cash in lieu of fractional shares, as
discussed below), and the Common Stock will continue to have a par value of
$0.001 per share. Consummation of the Reverse Stock Split will not alter the
number of authorized shares of the Company's Common Stock, which will remain at
200,000,000, of which approximately 191,021,003 shares of Common Stock would
constitute authorized but unissued and unreserved shares.
The Board of Directors believes that a high number of shares of Common
Stock outstanding and its relatively low per-share market price may impair the
development of a trading market for the Common Stock and its acceptability to
certain institutional investors and other members of the investing public.
While the number of shares outstanding should not, by itself, affect the
marketability of a stock, the type of investor who acquires such stock or the
Company's reputation in the financial community, the Company believes that, in
practice, this is not necessarily the case, as certain investors view
low-priced, infrequently traded stock as unattractive or, as a matter of
policy, are precluded from purchasing low-priced shares. In addition, certain
brokerage houses, as a matter of policy, will not extend margin credit on
stocks trading at low prices. On the other hand, certain other investors may be
attracted to low-priced stock because of the greater trading volatility
sometimes associated with such securities. Finally, it has come to the
Company's attention that the National Association of Securities Dealers, Inc.,
has proposed an amendment to its by-laws governing The Nasdaq Stock
Market which would require that a company listed on its Small-Cap Market
maintain a per-share market price of at least $1.00.
There can be no assurance that the Reverse Stock Split will not
adversely impact the market price of, or the development of a trading market
for, the Common Stock, that the marketability of the Common Stock will improve
as a result of approval of the Reverse Stock Split or that the approval of the
Reverse Stock Split will otherwise have any of the effects described herein.
The certificates presently representing shares of Common Stock will be
deemed, at the effective time of the reverse stock split to represent one-tenth
the number of shares of Common Stock after the effective date of the Reverse
Stock Split. As soon as is practicable following the effective date of the
Reverse Stock Split, shareholders will be notified and requested to surrender
their current certificates to the Company's stock transfer agent in exchange
for the issuance of new certificates reflecting the Reverse Stock Split. No
fractional shares of Common Stock will be issued, and, in lieu thereof,
shareholders holding a number of shares of Common Stock not evenly divisible by
ten, and shareholders holding less than ten shares of Common Stock, upon
surrender of their old certificates, will receive cash in lieu of fractional
shares of Common Stock. The price payable by the Company
-17-
<PAGE> 21
for the fractional shares of Common Stock will be market price per share of
pre-reverse split Common Stock as of the effective date of the reverse stock
split.
The funds required to purchase the fractional shares are available and
will be paid from the current cash reserves of the Company. The Company's
shareholder list indicates that a portion of the outstanding Common Stock is
registered in the names of clearing agencies and broker nominees. It is,
therefore, not possible to predict with certainty the number of fractional
shares and the total amount that the Company will be required to pay for
fractional share interests. However, it is not anticipated that the funds
necessary to effect the cancellation of fractional shares will be material.
As of December 13, 1996, approximately 185 persons were holders of
record of Common Stock. The Company does not anticipate that the Reverse Stock
Split and the payment of cash in lieu of factional shares will result in a
significant reduction in the number of holders of record of Common Stock. The
Company does not presently intend to seek, either before or after the Reverse
Stock Split, any change in the Company's status as a reporting company for
federal securities law purposes.
Except as described below with respect to cash received in lieu of
fractional share interests, the receipt of Common Stock in the Reverse
Stock Split should not result in any taxable gain or loss to shareholders for
U.S. federal income tax purposes. If the Reverse Stock Split is approved, the
U.S. tax basis of Common Stock received as a result of the Reverse Stock Split
(including any fractional share interests to which a shareholder is entitled)
will be equal, in the aggregate, to the basis of the shares exchanged for the
Common Stock. For U.S. federal income tax purposes, the holding period of the
shares immediately prior to the effective date of the Reverse Stock Split will
be included in the holding period of the Common Stock received as a result of
the Reverse Stock Split, including any fractional share interests to which a
shareholder is entitled. A shareholder who receives cash in lieu of fractional
shares of Common Stock will be treated as first receiving such fractional
shares and then receiving cash as payment in exchange for such fractional
shares of Common Stock, and such cash payment will likely be treated as a
dividend for U.S. federal income tax purposes.
SHAREHOLDERS ARE ADVISED TO CONSULT THEIR OWN TAX ADVISORS FOR MORE
DETAILED INFORMATION REGARDING THE EFFECTS OF THE PROPOSED REVERSE SPLIT ON
THEIR INDIVIDUAL TAX STATUS.
In accordance with Nevada law and notwithstanding approval of the
proposal by shareholders, at any time prior to the effective date of the
Reverse Stock Split, the Board of Directors may, in its sole discretion,
abandon the proposal without any further action by shareholders. Assuming the
presence of a quorum, the affirmative vote of the holders of a majority of the
voting power of the outstanding shares of Common Stock is necessary for
approval of the Reverse Stock Split.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" THE
APPROVAL OF THE PROPOSAL TO EFFECT THE REVERSE STOCK SPLIT.
PROPOSAL 2 - AMENDMENT OF ARTICLES OF
INCORPORATION TO INCREASE SHARE OWNERSHIP
REQUIREMENT FOR CALLING SPECIAL MEETING OF SHAREHOLDERS
The Board of Directors has unanimously approved, and recommends that
the shareholders adopt, an amendment to Article V of the Articles of
Incorporation to increase the share ownership required in order to call a
special meeting of the shareholders. If the proposed amendment is adopted,
Article V will be amended as follows (struck-through text indicates deletions,
text in italics indicates additions):
-18-
<PAGE> 22
STOCKHOLDERS MEETING: Meetings of the shareholders shall be
held at such place within or without the State of Nevada as may be
provided by the By-laws of the corporation. Special meetings of the
shareholders may be called by the President or any other executive
officer of the corporation, the Board of Directors, or any member
thereof, or by the record holder or holders of at least [ten
percent (10%)] <thirty percent (30%)> of all shares entitled to vote
at the meeting. Any action otherwise required to be taken at a
meeting of the shareholders, except election of directors, may be
taken without a meeting if a consent in writing, setting forth the
action so taken, shall be signed by shareholders having at least
a majority of the voting power.
The Board of Directors believes that the increase in the share
ownership required in order to call a special meeting of the shareholders is in
the best interest of the Company and its shareholders because it will reducing
the time and expense to the Company that may result from requests for special
meetings by the holders of relatively small numbers of shares.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE "FOR" THE
ADOPTION OF THE AMENDMENT TO THE ARTICLES OF INCORPORATION TO INCREASE THE
SHARE OWNERSHIP REQUIRED IN ORDER TO CALL A SPECIAL MEETING OF THE
SHAREHOLDERS.
PROPOSAL 3 - AMENDMENT OF ARTICLES OF
INCORPORATION TO ESTABLISH THREE CLASSES OF DIRECTORS AND
CLARIFY PROVISIONS APPLICABLE TO DIRECTORS AND OFFICERS
The Board of Directors has unanimously approved, and recommends that
the shareholders adopt, amendments to Article VIII and Article IX of the
Articles of Incorporation to establish three classes of directors with
staggered, three-year terms and to clarify provisions of the Articles of
Incorporation applicable to directors and/or officers. If the proposed
amendment is adopted, the following new sentences will be added at the
beginning of Article VIII:
BOARD OF DIRECTORS: The number of directors of the corporation
shall be a minimum of three and a maximum of 25, approximately
one-third of whom shall be classified as "Class I" directors,
approximately one-third of whom shall be classified as "Class II"
directors and approximately one-third of whom shall be classified as
"Class III" directors. Class I, Class II and Class III directors shall
be elected in consecutive years. Each director shall serve as a
director until the annual meeting of shareholders occurring in the
year three years following his election and until his successor shall
have been elected and qualified. Notwithstanding the foregoing
sentence, Class I directors shall be elected for one-year terms, and
Class II directors shall be elected for two-year terms, at the annual
meeting of shareholders where three classes of directors are initially
established.
Also, if the proposed amendment is adopted, Article IX will be amended as
follows (struck-through text indicates deletions, text in italics indicates
additions, and ellipses indicate omissions of paragraphs of Article IX not
amended):
[] indicates struck-through text; <> indicates italicized text.
-19-
<PAGE> 23
OFFICERS: The officers of the corporation shall consist of [a
Board of Directors of not less than three nor more than twenty-five] a
Chairman of the Board of Directors, a President, a Vice President, a
Secretary, [and] a Treasurer <or Chief Financial Officer and a
Financial Controller>, who shall perform such duties and have such
authority as usually pertains to such officers of a corporation or as
may be prescribed by the Board of Directors from time to time.
. . . .
ELECTION: Directors shall be elected at the Annual Meeting of
the Shareholders, <as set forth in Article VIII,> and the persons
receiving the highest number of votes shall be declared duly elected
<to the positions for which votes are solicited>, providing such
numbers shall represent a majority of all votes cast. Within ten (10)
days after the election, the directors shall meet and elect a
<Chairman,> President, Vice President, Secretary<,> [and] Treasurer
<or Chief Financial Officer and Financial Controller>.
TERM OF OFFICE: <The term of office of directors shall be as set
forth in Article VIII, and t>[T]he term of office of all [directors
and] officers shall be [one year]<from time to time as determined by
the Board of Directors>, provided all directors and officers shall
hold office until their successors are duly elected and qualified.
. . . .
The Company currently has seven directors, all of whom serve one-year
terms. The Board of Directors believes that it is in the best interest of the
Company to provide for staggered terms for directors in order to ensure
experienced leadership for the Company. The proposed amendment would change
Article VIII of the Articles of Incorporation provide that roughly one-third of
the directors be elected each year for a three-year term, except that all of
the directors would be elected at this Annual Meeting and approximately
one-third of those elected will be designated as Class I directors, to serve an
initial one-year term, and approximately one-third of those elected will be
designated as Class II directors, to serve an initial two-year term. The
remaining one-third of the directors elected at this Annual Meeting would be
Class III directors, to serve a normal three-year term in accordance with
Article VIII. The proposed amendment also would make necessary corresponding
changes to Article IX, as well as setting forth the officers currently
appointed by the Board of Directors.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE "FOR" THE
ADOPTION OF THE AMENDMENT TO THE ARTICLES OF INCORPORATION TO ESTABLISH THREE
CLASSES OF DIRECTORS AND TO CLARIFY PROVISIONS APPLICABLE TO DIRECTORS AND
OFFICERS.
PROPOSAL 4 - AMENDMENT OF BY-LAWS TO ALLOW
AMENDMENTS TO BY-LAWS BY BOARD OF DIRECTORS OR BY
HOLDERS OF A MAJORITY OF A QUORUM OF OUTSTANDING SHARES
The Board of Directors recommends that the shareholders adopt an
amendment to Article XI of the By-Laws to allow the Board of Directors to amend
the By-Laws and to allow a majority of a quorum of the outstanding shares to
amend the By-Laws. If the proposed amendment is adopted, Article XI will be
amended as follows (struck-through text indicates deletions, text in italics
indicates additions):
[] indicates struck-through text; <> indicates italicized text.
-20-
<PAGE> 24
These by-laws may be altered, amended or repealed and new
by-laws may be adopted by <a vote of a majority of a quorum of the
directors, or by> a vote of the stockholders representing a majority of
<a quorum of> all the shares issued and outstanding[,] at any annual
stockholders' meeting or at any special stockholders' meeting when
the proposed amendment has been set out in the notice of such meeting.
The Board of Directors believes that the adoption of this By-Law
amendment is in the best interest of the Company and its shareholders, as it
will allow the Board of Directors to change the By-Laws without the necessity
of obtaining shareholder approval, and it will allow the holders of a majority
of a quorum of the outstanding shares to change the By-Laws. The amendment
would bring the By-Laws into compliance with Article XII of the Articles of
Incorporation, which gives the Board of Directors "authority to adopt such
by-laws as in their judgment may be deemed necessary or advisable for the
management and transaction of the business of the corporation . . . ."
THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE "FOR" THE
ADOPTION OF THE AMENDMENT TO GIVE THE BOARD OF DIRECTORS AND THE HOLDERS OF A
QUORUM OF THE OUTSTANDING SHARES THE POWER TO AMEND THE BY-LAWS.
PROPOSAL 5 - AMENDMENT OF THE 1995 STOCK OPTION
PLAN TO CHANGE THE NUMBER OF SHARES SUBJECT THERETO AND TO
REDUCE THE REQUIRED HOLDING PERIOD FOR NON-QUALIFIED OPTIONS
The Board of Directors recommends that the shareholders adopt an
amendment to 1995 Stock Option Plan (the "Plan") to change the method by which
the number of shares of Common Stock available for the Plan is determined,
resulting in an increase in such number, and to reduce the required holding
period for non-qualified options. If the proposed amendment is adopted, Section
12 of the Plan will be amended as follows (struck-through text indicates
deletions, text in italics indicates additions):
Shares Available for the Plan.
Subject to adjustments as provided in Section 12, [an aggregate of
2,400,000]<the number of> shares of Common Stock of the Company
(hereinafter the "shares") <which> may be issued pursuant to the Plan
<is that number of shares which would, in the aggregate and if deemed
outstanding, constitute 20% of the Company's then-outstanding shares
of Common Stock, as determined at the time of granting stock options>.
Such shares may represent authorized but unissued shares. If any
grant under the Plan expires or terminates unexercised, becomes
unexercisable or is forfeited as to any shares, such unpurchased or
forfeited shares shall thereafter be available for further grants
under the Plan.
Also, if the proposed amendment is adopted, Section 6(d) of the Plan will be
amended as follows (struck-through text indicates deletions, text in italics
indicates additions):
(d) Terms of Options. The term during which each option may be
exercised shall be determined by the Committee, but in no
event shall an <Incentive Stock O>[o]ption be exercisable in
whole or in part in less than one year or, in the case of a
Nonqualified Stock Option, more than ten years and one day
from the date it is granted, or, in the case of an Incentive
Stock Option, ten years from the date it is granted; and, in
the case of the grant of an Incentive Stock Option to an
employee who at the time of the grant owns more than 10% of
the total combined voting power of all classes of stock of the
Company or any of its subsidiaries, in no event shall such
option be exercisable, if required by the Code at the time of
grant, more than five years from the date of the grant.
[ ] indicates struck-through text; < > indicates italicized text.
-21-
<PAGE> 25
For information concerning the terms of the Plan and the stock options
currently outstanding pursuant thereto, please see "Stock Options" under Item
12 of the Company's Form 10-K annual report for the fiscal year ended December
31, 1995, a copy of which is provided herewith and incorporated herein by
reference. In addition, as of July 1, 1995, pursuant to the recommendation of a
committee of disinterested persons appointed by the board of directors in
accordance with the terms of the Stock Option Plan (the "Plan") adopted by the
Company as of March 31, 1995, the board of directors granted options to the
following officers and directors to purchase shares of the Company's Common
Stock:
<TABLE>
<S> <C>
Yiu Yat Hung 6,000 shares
Tam Cheuk Ho 6,000 shares
Han Jianzhun 6,000 shares
Li Feilie 100,000 shares
</TABLE>
In addition, the board of directors granted options to the following employees
and consultant to purchase shares of the Company's Common Stock:
<TABLE>
<S> <C>
Brender Services Limited 100,000 shares
Wong Wah On 6,000 shares
Cheung Yu Shum 500,000 shares
Tse Chi Kai 300,000 shares
Ma Sin Ling 500,000 shares
Cheung Siu Yin 10,000 shares
Woo Pui Yan 10,000 shares
Kwok Kwan Hung 386,000 shares
Fu Yang Guang 200,000 shares
Lin Jia Ping 270,000 shares
</TABLE>
All of the stock options were issued in accordance with the terms of the Plan
at an exercise price of US$3.78 (the fair market value of the Common Stock as
of July 1, 1995) and would have been exercisable beginning on July 1, 1996, and
until July 1, 2005.
As of May 20, 1996, the board of directors, in accordance with the
recommendation, with respect to stock options granted to directors and
officers, of a committee of disinterested persons appointed by the board of
directors in accordance with the terms of the Plan, reduced the exercise prices
of all of the outstanding options to US$0.42 (the fair market value of the
Common Stock as of May 20, 1996). By virtue of this action, the outstanding
options are now exercisable beginning on May 20, 1997, and until May 20, 2006.
Stock options have now been granted with respect to all 2,400,000 shares of
Common Stock subject to the Plan, and all stock options remain outstanding.
The Board of Directors believes that the adoption of this amendment to
the Plan is in the best interest of the Company and the shareholders. The
amendment will allow the number of shares available for stock option grants to
increase proportionately with the number of shares of Common Stock outstanding.
This "floating" number
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<PAGE> 26
will enable the Board of Directors to grant additional stock options to
employees, officers, directors and consultants if increases in outstanding
shares of Common Stock occur. Also, the amendment will allow the Board of
Directors to grant non-qualified stock options with holding periods of less
than one year.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE "FOR" THE
ADOPTION OF THE AMENDMENT TO 1995 STOCK OPTION PLAN TO PROVIDE FOR AN INCREASE
IN THE NUMBER OF SHARES SUBJECT THERETO ON A PROPORTIONAL BASIS AND TO ALLOW
THE GRANTING OF NON-QUALIFIED STOCK OPTIONS WITH HOLDING PERIODS OF LESS THAN
ONE YEAR.
PROPOSAL 6 - ELECTION OF DIRECTORS
The Company's Board of Directors is currently comprised of seven
directors, and it may be increased to no more than 25 directors or decreased to
no fewer than three directors by action of the Board of Directors. With the
adoption of Proposal 2 hereinabove, such directors will be divided into three
classes. Typically, one class will be elected each year for a three-year term.
However, as three classes of directors are newly established, the Class I
directors will be elected at this Annual Meeting for one-year terms, the Class
II directors will be elected for two-year terms and the Class III directors
will be elected for normal three-year terms.
At the Annual meeting, Messrs. Yiu Yat Hung and Tam Cheuk Ho will be
nominated to serve in Class I until the annual meeting to be held in 1997 and
until their successors have been duly elected and qualified. Also, Messrs. Wang
Faren and Han Jian Zhun will be nominated to serve in Class II until the annual
meeting to be held in 1998 and until their successors have been duly elected
and qualified. Finally, Messrs. Yang Jiangang, Li Shunxing and Zhang Yibing
will be nominated to serve in Class III until the annual meeting to be held in
1999 and until their successors have been duly elected and qualified. All of
the nominees are currently serving as directors of the Company, all have
consented to being named herein and all have indicated their intention to serve
as directors of the Company, if elected.
Unless authority to do so is withheld, the persons named as proxies
will vote the shares represented by such proxies for the election of the
nominees. In case any of the nominees shall become unavailable for election to
the Board of Directors, which is not anticipated, the persons named as proxies
shall have full discretion and authority to vote or refrain from voting for any
other nominees in accordance with their judgment. Vacancies on the Board of
Directors may be filled by the remaining director or directors, even though
less than a quorum, for the unexpired term of such vacant position.
The nominees and certain information about them are set forth below:
CLASS I DIRECTORS:
Mr. Yiu Yat Hung, 44, has been a Vice Chairman of the Board of
Directors of the Company since December, 1994. He is also the Vice-Chairman of
the Board of Directors of Hainan Agricultural Resources Company Limited
("HARC"), and since June, 1988, has been the Chairman of the Board of Directors
and Managing Director of Hong Wah Investment Holdings Limited, a Hong Kong
incorporated private group of companies and a shareholder of the Company. From
January, 1990 through December, 1992, Mr. Yiu was the Chairman of Shenzhen Hong
Wah Industrial and Commerce Company, Ltd., a Sino-foreign limited liability
joint stock company,
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<PAGE> 27
and was responsible for the formulation of that entity's investment strategy.
Mr. Yiu has more than 12 years of experience in the financial, commerce and
industrial fields in both the PRC and Hong Kong. Mr. Yiu is currently a member
of the Chinese General Chamber of Commerce Hong Kong and the Federation of Hong
Kong Industries. Mr. Yiu is also the Vice Chairman of the Shenzhen Association
of Enterprises with Foreign Investment and a standing committee member of the
China Association of Enterprises with Foreign Investment.
Mr. Tam Cheuk Ho, 34, has been a Director and the Chief Financial
Officer of the Company since December, 1994. Prior to joining the Company,
from July, 1984 through January, 1992, he worked as Audit Manager at Ernst &
Young, Hong Kong, and from February, 1992 through September, 1992, as Financial
Controller at Tack Hsin Holdings Limited, a listed company in Hong Kong, where
he was responsible for accounting and financial functions. From October, 1992,
through December, 1994, Mr. Tam was Finance Director of Hong Wah Investment
Holdings Limited. He is an associate of the Hong Kong Society of Accountants
and a fellow of the Chartered Association of Certified Accountants. He is also
a certified public accountant in Hong Kong. He holds a Bachelor's degree in
Business Administration from the Chinese University of Hong Kong.
CLASS II DIRECTORS:
Mr. Wang Faren, 49, has been a Vice Chairman of the Board of Directors
of the Company since December, 1994. He is also the Chairman of the Board of
Directors of HARC. Mr. Wang joined the Farming Bureau in 1968 and worked for 13
years at the Hainan State Farms. Mr. Wang joined the top management of the
Farming Bureau in 1986 as its Deputy Director. He became a Director of the
Farming Bureau in October, 1991, and remains in that position today. Mr. Wang
graduated from South China Tropical Species Research Institute, an agricultural
engineering institute, and received extensive training on agricultural
engineering, botany and tropical plantation. Mr. Wang has more than 25 years of
experience in agricultural production and management.
Mr. Han Jian Zhun, 48, has been a Director of the Company since
December, 1994, and the Vice President since March 15, 1995. He is also the
President and General Manager of HARC. Mr. Han joined the Farming Bureau in
1968 and has consistently addressed agriculture production and management
issues. Mr. Han joined the top management of the Farming Bureau in 1986 and
became the Deputy Director in 1991. Mr. Han was also the General Manager of Ba
Ye State Rubber Farms from 1990 through 1991. Mr. Han is heavily involved in
industrial management of the Farming Bureau.
CLASS III DIRECTORS:
Mr. Yang Jiangang, 35, has been the Chairman of the Board of Directors
of the Company since December, 1994. He is also a Director of HARC. Mr. Yang
joined the Bank of China Head Office Beijing in 1983 and worked in the Treasury
Division there from 1983 through 1993. He was transferred in January, 1990, to
the Head Office to be the Deputy Manager of the Fixed Income Division, where he
was in charge of fixed income investment
-24-
<PAGE> 28
of foreign exchange reserves of the PRC. In June, 1992, Mr. Yang was relocated
to the Bank of China London Branch where he was in charge of treasury
operations until April, 1993. He resigned from the Bank of China in April,
1993, and joined China Everbright Holdings Company Limited, which is a PRC
state-owned enterprise with a number of overseas subsidiaries, as Deputy
General Manager of the Finance Department. In October, 1993, Mr. Yang became
the Deputy General Manager of Everbright Finance & Investment Co. Limited
("Everbright"), a wholly-owned Hong Kong subsidiary of China Everbright
Holdings Company Limited and a shareholder of the Company, and is presently the
Director and Deputy General Manager. Mr. Yang graduated from Beijing
International Relationship Institute with a Bachelor's degree.
Mr. Li Shunxing, 45, has been the President of the Company since
December, 1994, and a Director since March 15, 1995. He is also a Director of
HARC. He has been the Director and General Manager of Worlder International
Company Limited, a shareholder of the Company, and Director and Deputy General
Manager of Worlder Shipping Limited, both of which are Hong Kong based,
wholly-owned subsidiaries of SINOTRANS GROUP, a PRC state-owned enterprise,
since September, 1992. From June, 1990 through August, 1992, Mr. Li was the
Director and Executive Deputy General Manager of Cheemimet Finance Ltd. Hong
Kong in charge of finance, property development and investment matters. For
over 15 years, he has been working with conglomerates in China and their
subsidiaries abroad under the Ministry of Foreign Trade and Economic
Corporation and has extensive experience in corporate management, finance,
investment and foreign trade. Mr. Li graduated from the University of
International Business & Economics, Beijing, in 1976 with a Bachelor's degree.
Mr. Zhang Yibing, 30, has been a Director and the Secretary of the
Company since December, 1994. He is also a Director of HARC. Mr. Zhang joined
Bank of China Beijing Head Office in 1987, working in the Treasury and Asset
Liability Sector. Mr. Zhang was assigned to Bank of China Sydney Branch in 1988
where he was in charge of foreign exchange and money market areas of the
treasury. In March, 1991, Mr. Zhang was transferred to the Bank of China
Beijing Head office where he was the Assistant Manager of Fixed Income Division
until December, 1992, when he resigned from the Bank and joined China
Everbright Holdings Co., Ltd. as Finance Manager. Mr. Zhang became the
Corporate Finance Manager of Everbright, a wholly-owned subsidiary of China
Everbright Holdings Co. Ltd. and a shareholder of the Company, in October,
1993, and, in March, 1994, was appointed the Senior Manager of Everbright,
where he was in charge of investment and lending. In February 1995, Mr. Zhang
became a director of Everbright. Mr. Zhang graduated from Beijing Foreign
Languages Institute with a Bachelor's Degree.
INFORMATION REGARDING BOARD OF DIRECTORS AND COMMITTEES
The Company's Board of Directors held five meetings during 1995, and
all other actions of the Board were taken pursuant to unanimous written
consents. The Board of Directors does not have an audit, compensation or
nominating committee. The Board as a whole operates as a committee to nominate
directors and to administer the Company's 1995 Stock Option Plan (except that a
committee of three disinterested persons was formed to act with respect to
stock options issued to directors). Each director attended all of the meetings
of the Board of Directors during the period for which he was a director.
The Board of Directors, acting as a nominating committee, will
consider candidates for director nominated by shareholders. A shareholder who
wishes to submit a candidate for consideration at the 1997 annual meeting must
notify the Secretary of the Company in writing no later than March 2, 1997.
The shareholder's written notice must include information about each proposed
nominee, including name, age, business address, principal occupation, shares
beneficially owned and other information required in proxy solicitations. The
-25-
<PAGE> 29
nomination notice must also include the nominating shareholder's name and
address and the number of shares of stock beneficially owned by the
shareholder. The shareholder must also furnish a statement from the candidate
indicating that the candidate wishes and is able to serve as a director. These
procedures, and a statement that the shareholder intends to make the
nomination, are prerequisites to a stockholder nominating a candidate at the
annual meeting.
COMPENSATION OF DIRECTORS
During 1995, directors of the Company did not receive compensation for
their service as directors.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE "FOR" THE
ELECTION OF THE NOMINEES DESCRIBED ABOVE.
PROPOSAL 7 - APPOINTMENT OF INDEPENDENT ACCOUNTANTS
Subject to ratification by the shareholders, the Board of Directors
has reappointed Ernst & Young, Certified Public Accountants, as independent
accountants to audit the consolidated financial statements of the Company for
the year 1996. Ernst & Young has served as the Company's Independent
Accountants since March of 1995.
On March 16, 1995, the Company executed an engagement letter with the
certified public accounting firm of Ernst & Young, which detailed the scope of
work to be performed by Ernst & Young during the next year. After executing the
letter agreement with Ernst & Young to serve as independent auditors for the
Company, the Company terminated its relationship with the certified public
accounting firm of H. J. Swart & Company, P.A. (the "Former Accountants"), by
letter from the Company's counsel dated March 21, 1995. The Company's decision
to change accountants was approved by the Company's Board of Directors.
The Former Accountants' reports on the Company's financial status for
the years ended December 31, 1992, and December 31, 1993, did not contain an
adverse opinion or a disclaimer of opinion, nor was it qualified or modified as
to uncertainty, audit scope, or accounting principles. Since the engagement of
the Former Accountants in 1993 and until the dismissal of the Former
Accountants, there were no disagreements with the Former Accountants on any
matter of accounting principles or practices, financial statement disclosure,
or auditing scope or procedure, which disagreements, if not resolved to the
satisfaction of the Former Accountants, would have caused it to make reference
to the subject matter of the disagreements in connection with its reports.
The Company filed a Form 8-K current report dated March 16, 1995,
setting forth the above information. The Company, through its counsel,
delivered a copy of the Form 8-K to the Former Accountants on March 21, 1995,
and requested that the Former Accountants review the disclosures contained
therein and provide a response as promptly as possible so the Company could
file the response within ten business days after the filing of the Form 8-K.
The Company received a response from the Former Accountants by letter dated
March 22, 1995, in which the Former Accountants indicated that they agreed with
the disclosures and statements made by the Company in the Form 8-K. The Company
then amended the previously filed Form 8-K by filing a Form 8-K/A to include
the response of the Former Accountants, which was attached thereto as an
exhibit.
-26-
<PAGE> 30
If the shareholders should fail to ratify the appointment of Ernst &
Young as its independent accountants, the Board of Directors would reconsider
the appointment.
It is expected that representatives of Ernst & Young will be present
at the Annual Meeting, will have an opportunity to make a statement if they
desire to do so and will be available to answer appropriate questions.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" RATIFICATION OF THE
APPOINTMENT OF ERNST & YOUNG AS THE COMPANY'S INDEPENDENT ACCOUNTANTS.
OTHER INFORMATION
For other information regarding the Company, including Executive
Compensation, Financial and Other Information, Certain Relationships and
Related Transactions and Compliance with Section 16(a) of the Securities
Exchange Act of 1934, as amended, please see the appropriate Items of the
Company's Form 10-K annual report for the fiscal year ended December 31, 1995,
a copy of which is provided herewith and incorporated herein by reference.
This proxy statement and the Form 10-K provided herewith may contain
forward-looking statements. Shareholders are cautioned that any such
forward-looking statement is not a guarantee of future performance and involves
risks and uncertainties, and that actual results may differ materially from
those in this proxy statement and the Form 10-K as a result of various factors.
The information contained herein and in the Form 10-K, including without
limitation the information under the heading, "Management's discussion and
Analysis of Financial Condition and Results of Operations," identifies
important factors that could cause such differences. With respect to any such
forward-looking statement that includes a statement of its underlying
assumptions or bases, the Company cautions that, while it believes such
assumptions or bases to be reasonable and has formed them in good faith,
assumed facts or bases almost always vary from actual results, and the
differences between assumed facts or bases and actual results can be material
depending on the circumstances. When, in any forward-looking statement, the
Company, or its management, expresses an expectation or belief as to future
results, that expectation or belief is expressed in good faith and is believed
to have a reasonable basis, but there can be no assurance that the stated
expectation or behalf will result or be achieved or accomplished.
SHAREHOLDER PROPOSALS FOR 1997 ANNUAL MEETING
To be considered for inclusion in next year's proxy materials,
shareholder proposals to be presented at the Company's 1997 annual meeting must
be in writing and be received by the Company no later than March 2, 1997.
OTHER BUSINESS
The Board of Directors does not know of any business to be brought
before the Annual Meeting other than the matters described in the Notice of
Annual Meeting. However, if any other matter are properly presented for action,
it is the intention of each person named in the accompanying proxy to vote said
proxy in accordance with his judgment on such matters.
-27-
<PAGE> 31
EXHIBIT A
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1995
CHINA RESOURCES DEVELOPMENT, INC.
(Exact name of Registrant as specified in its Charter)
Nevada 87-0262643
------ ----------
(State or other jurisdiction of incorporation) (IRS Employer Identification No.)
2440 South Progress Drive, Salt Lake City, Utah 84119
Telephone: (801) 972-2201
(Address and telephone number of principal executive offices)
Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
None None
---------------------------- --------------------------------
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.001 par value
-----------------------------------
(Title of class)
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 if disclosure of delinquent filers in pursuant
to Item 405 of Regulation S-K (Section 229.405) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
State the aggregate market value of the voting stock held by
non-affiliates of the registrant computed by reference to the price at which
the stock was sold, or the average bid and asked prices of such stock, as of a
specified date within 60 days prior to the date of filing. (See definition of
affiliate in Rule 405, 17 CFR 230.405.): $2,599,340 as of March 29, 1996.
Note: If a determination as to whether a particular person or entity
is an affiliate cannot be made without involving unreasonable effort and
expense, the aggregate market value of the common stock held by non-affiliates
may be calculated on the basis of assumptions reasonable under the
circumstances, provided that the assumptions are set forth in this Form.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date. 12,352,893 shares
of Common Stock, $.001 par value (As of March 29, 1996).
DOCUMENTS INCORPORATED BY REFERENCE: None
--------
Page 1 of 157 pages Exhibit Index on Page 114
<PAGE> 32
CONVENTIONS
Unless otherwise specified, all references in this report to "U.S.
Dollars," "Dollars," "US$," or "$" are to United States dollars; all references
to "Hong Kong Dollars" or "HK$" are to Hong Kong dollars; and all references to
"Renminbi" or "Rmb" or "yuan" are to Renminbi yuan, which is the lawful
currency of the People's Republic of China ("China" or "PRC"). The Company and
Billion Luck maintain their accounts in U.S. Dollars and Hong Kong Dollars,
respectively. HARC and the Operating Subsidiaries maintain their accounts in
Renminbi. The financial statements of the Company and its subsidiaries are
prepared in Renminbi. Translations of amounts from Renminbi to U.S. Dollars
and from Hong Kong Dollars to U.S. Dollars are for the convenience of the
reader. Unless otherwise indicated, any translations from Renminbi to U.S.
Dollars or from U.S. Dollars to Renminbi have been made at the single rate of
exchange as quoted by the People's Bank of China (the "PBOC Rate") on December
31, 1995, which was U.S.$1.00 = Rmb8.32. The Renminbi is not freely
convertible into foreign currencies and the quotation of exchange rates does
not imply convertibility of Renminbi into U.S. Dollars or other currencies.
Translations from Hong Kong Dollars to U.S. Dollars have been made at the
single rate of exchange as quoted by the Hongkong and Shanghai Banking
Corporation Limited on December 31, 1995, which was US$1.00 = HK$7.73. All
foreign exchange transactions take place either through the Bank of China or
other banks authorized to buy and sell foreign currencies at the exchange rates
quoted by the People's Bank of China. No representation is made that the
Renminbi or U.S. Dollar amounts referred to herein could have been or could be
converted into U.S. Dollars or Renminbi, as the case may be, at the PBOC Rate
or at all.
References to "Billion Luck" are to Billion Luck Company Ltd., a
British Virgin Islands company, which is a wholly-owned subsidiary of the
Company.
References to "Central Government" refer to the national government of
the PRC and its various ministries, agencies, and commissions.
References to "Common Stock" are to the Common Stock, $.001 par value,
of China Resources Development, Inc.
References to "Company" are to China Resources Development, Inc., and
include, unless the context requires otherwise, the operations of Billion Luck,
HARC, First Supply, and Second Supply (all as hereinafter defined).
References to "Farming Bureau" are to the Hainan Agricultural
Reclamation General Company, a division of the Ministry of Agriculture, the PRC
government agency responsible for matters relating to agriculture.
References to "First Supply" are to First Goods And Materials Supply
And Sales Corporation, a company organized in the PRC and a wholly-owned
subsidiary of HARC.
References to "GAAP" are to generally accepted accounting principles
of the United States.
References to "Guilinyang Farm" are to Hainan Province Guilinyang
State Farm, a PRC entity which is owned and controlled by the Farming Bureau.
References to "Hainan" are to Hainan Province of the PRC.
References to "Hainan Reclamation Area" are to the 2,110,234 acres of
formerly barren land in Hainan that the PRC Government has converted to
productive agricultural use since 1952, which includes the largest rubber
production base in China, as well as rubber production facilities, timber
production facilities, cultivation areas for tea and tropical crops, and other
industries.
References to "Hainan State Farms" are to the rubber farms in Hainan
controlled by the Farming Bureau.
-3-
<PAGE> 33
References to "HARC" are to Hainan Agricultural Resources Company
Limited, a Sino-foreign joint stock company organized in the PRC, whose capital
is owned 56% by Billion Luck, 39% by the Farming Bureau and 5% by Guilinyang
Farm.
References to "Local Governments" are to governments in the PRC,
including governments at all administrative levels below the Central
Government, including provincial governments, governments of municipalities
directly under the Central Government, municipal governments, county
governments, and township governments.
References to "MU" are to an area of approximately 667 square meters.
References to "Operating Subsidiaries" are to the consolidated
operations, assets and/or activities, as the context indicates, of First
Supply, and Second Supply.
References to the "PRC" or "China" include all territory claimed by or
under the control of the Central Government, except Hong Kong, Macau, and
Taiwan.
References to "PRC Government" include the Central Government and
Local Governments.
References to "Provinces" include provinces, autonomous regions, and
municipalities directly under the Central Government.
References to "Second Supply" are to Second Goods And Materials Supply
And Sales Corporation, a company organized in the PRC and a wholly-owned
subsidiary of HARC.
References to "Series A Preferred Stock" are to the Company's Series A
Preferred Stock, $1.00 par value.
References to "Series B Convertible Preferred Stock" are to the
Company's Series B Convertible Preferred Stock, $.001 par value.
References to the "State Plan" refer to the plans devised and
implemented by the PRC Government in relation to the economic and social
development of the PRC.
References to "Tons" are to metric tons.
-4-
<PAGE> 34
PART I
[Item 1] BUSINESS
GENERAL
The Company was incorporated as Magenta Corp. on January 15, 1986, in
the State of Nevada. The Company was formed to acquire businesses that would
provide a profit to the Company. The Company had no operating business until
control of it was acquired in December, 1994, by the former shareholders of
Billion Luck, who exchanged all of the issued and outstanding shares of capital
stock of Billion Luck for 10,800,000 shares of the Company's Common Stock. As
a result of the acquisition, the former shareholders of Billion Luck acquired
90% of the issued and outstanding shares of the then outstanding Common Stock
of the Company and the Company became the owner of all the outstanding shares
of capital stock of Billion Luck.
Billion Luck was incorporated in the British Virgin Islands on
December 14, 1993. It conducts its activities through the Operating
Subsidiaries, which it controls through its 56% interest in HARC. HARC was
established in Hainan Province, the People's Republic of China, by Billion
Luck, Guilinyang Farm, and the Farming Bureau.
HARC is a Chinese company incorporated on June 28, 1994, with a
registered capital of Rmb100 million (US$12,019,231). Billion Luck made a cash
contribution of Rmb56 million (US$6,730,769) to purchase a 56% interest in
HARC. The remaining interests in HARC were acquired by Guilinyang Farm (5%)
for a cash contribution of Rmb5 million (US$600,962) and by the Farming Bureau
(39%) through the contribution of its interests in two of its subsidiaries,
First Supply and Second Supply, which were valued at Rmb39 million
(US$4,687,500) (based upon a valuation report prepared by the Hainan Accounting
Office, a PRC Certified Public Accountant, as of December 31, 1992). Pursuant
to an agreement dated January 31, 1994, between Billion Luck, Guilinyang Farm,
and the Farming Bureau, the parties thereto agreed to establish HARC to act as
the holding company of First Supply and Second Supply.
The Company, through the Operating Subsidiaries, First Supply and
Second Supply, purchases natural rubber produced by the 92 farms on the island
of Hainan in the PRC, which are controlled by the Farming Bureau. In 1994,
Hainan Province accounted for approximately 62% of the domestic production of
natural rubber in the PRC, of which approximately 79% of that 62% is from the
Hainan State Farms and approximately 21% is from non-state farms. Accordingly,
the Hainan State Farms control 49% of the PRC's domestic output of natural
rubber. The Operating Subsidiaries market and distribute the rubber to
customers throughout the PRC, such as tire manufacturers, rubber processing
plants, and import and export companies. These customers include state-owned
and non-state-owned enterprises. Because of the price risk associated with
certain firm commitments for the purchase of natural rubber, the Company,
through the Operating Subsidiaries, enters into natural rubber commodities
futures contracts to hedge the risk. As opportunities arise, the Operating
Subsidiaries also have a team of futures experts to manage and enter into
natural rubber commodities futures contracts that are not specific hedges, in
anticipation of a rise or fall in the price of natural rubber, based on their
knowledge of the supply and demand situation with respect to natural rubber in
the PRC. In addition, the Operating Subsidiaries procure, for the Farming
Bureau, the Hainan State Farms and other affiliated customers, many types of
production materials, such as building materials, automobiles and automobile
parts, farm equipment, fuel, and chemicals, as well as for other customers
unaffiliated with the Farming Bureau. First Supply and Second Supply were
originally established as state-owned enterprises in the PRC by the Farming
Bureau.
-5-
<PAGE> 35
The following chart illustrates the equity ownership by percentage of
the Company and each of its subsidiaries as of December 31, 1995:
<TABLE>
<S> <C> <C> <C> <C>
CHINA RESOURCES
DEVELOPMENT, INC.,
a Nevada corporation
100%
BILLION LUCK COMPANY LTD.,
a British Virgin Islands
company
5% 56% 39%
GUILINYANG FARM, FARMING BUREAU,
a PRC entity a division of
HAINAN AGRICULTURAL RESOURCES the PRC Ministry
COMPANY LIMITED, of Agriculture
a PRC company
100% 100%
FIRST SUPPLY, SECOND SUPPLY,
a PRC company a PRC company
(an "Operating (an "Operating
Subsidiary") Subsidiary")
</TABLE>
ORGANIZATIONAL AND MANAGEMENT STRUCTURE OF HARC
The assets of HARC consist primarily of the Operating Subsidiaries,
First Supply and Second Supply, which together are divided into 31 trading and
servicing divisions. The business of HARC is principally divided into the
natural rubber trade and materials trade. Each trading or servicing division
is a profit center or cost center and has its own accounting function. Every
quarter, each division submits its financial statements to First Supply or
Second Supply for consolidation. Those companies, in turn, submit the combined
accounts to HARC for consolidation. The General Manager of each division
accounts for its results to the General Manager of First Supply or Second
Supply, who, in turn, accounts for the overall results to the board of
directors of HARC.
HARC has a two-tier structure with a board of directors and a
supervisory board. The board of directors is responsible for the day-to-day
management of and all major decisions relating to HARC (except decisions that
may be made by HARC's shareholders during a general meeting of the
shareholders) and, as of December 31, 1995, was made up of 11 members, of which
five were nominated by the Farming Bureau and six were nominated by Billion
Luck. The Chairman of HARC was nominated by the Farming Bureau, and the
Vice-Chairman was nominated by Billion Luck. The General Managers of First
Supply and Second Supply are also members of the board of directors of HARC.
The General Manager and the Chief Finance Officer of HARC are also members of
the board. The General Manager of HARC was nominated by the Farming Bureau,
and the Chief Finance Officer was nominated by Billion Luck.
The supervisory board is responsible for supervising the board of
directors and the senior management of HARC in order to prevent the abuse of
rights and infringement of the interests of HARC and its shareholders and
employees. Among other responsibilities, members of the supervisory board
attend meetings of the board of directors and observe HARC's managers to ensure
that their acts do not contravene any laws or regulations or HARC's articles of
association or the resolutions of HARC's shareholders in meetings thereof. As
of December 31, 1995, the supervisory board was made up of five members, two of
which were nominated by Billion Luck and three of which were nominated by the
Farming Bureau. Two of the three members nominated by the Farming Bureau were
elected by the workers of HARC.
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The following chart illustrates the organizational and management
structure of HARC:
<TABLE>
<S> <C> <C> <C>
BOARD OF SUPERVISORY
DIRECTORS COMMITTEE
GENERAL MANAGER
DEPUTY DEPUTY DEPUTY
GENERAL MANAGER GENERAL MANAGER GENERAL MANAGER
FIRST SUPPLY(1) SECOND SUPPLY(2) HEADQUARTERS
</TABLE>
(1) The businesses in which First Supply's divisions engage include:
Natural Rubber, Metals, Fuels & Chemicals, Farm Equipment & Machinery,
Servicing, Building & Construction Materials, Fertilizers, Automobile
Trading, Transport & Delivery.
(2) The businesses in which Second Supply's divisions engage include:
Natural Rubber, Fuels & Chemicals, Building & Construction Materials,
Metals, Automobiles & Machinery, Futures Trading, Farm Equipment,
Transport & Delivery, Iron & Steel.
ACTIVITIES OF OPERATING SUBSIDIARIES
The Operating Subsidiaries function as affiliated trading partners of
the Farming Bureau and the Hainan State Farms. They purchase raw natural
rubber (both dried and latex) from the Hainan State Farms and resell the raw
natural rubber to customers throughout the PRC. The Operating Subsidiaries
also sell production materials, including building materials, fertilizers,
fuels, chemicals, farm equipment and machinery, automobiles, automobile parts
and electrical appliances to the Hainan State Farms, the Farming Bureau, and
other unaffiliated customers, and they trade natural rubber commodities futures
to hedge the price risk associated with certain firm commitments for the
purchase of natural rubber. The Operating Subsidiaries also enter into natural
rubber commodities futures contracts which are not specific hedges. See
Financial Statements and Notes included therein attached as Appendix A hereto.
In fulfilling their role as trading partners of the Farming Bureau,
the Operating Subsidiaries serve as a sales outlet for the raw natural rubber
produced by the Hainan State Farms and procure production materials for the
Farming Bureau and the Hainan State Farms. Before 1994, the Farming Bureau
generally established the selling price of natural rubber in order to allow the
Operating Subsidiaries to earn a pre-determined profit margin. Commencing in
1994, however, the Farming Bureau generally ceased establishing the selling
price of natural rubber, and instead allowed the Operating Subsidiaries to
determine the selling price according to market conditions, subject to a
minimum gross profit margin of 3.5% (before the purchase discount, as discussed
hereinbelow) to be earned by the Operating Subsidiaries on natural rubber
purchased from the Hainan State Farms as set forth in the Sale and Purchase
Agreement (as defined hereinbelow).
With respect to the procurement of materials and supplies, the
Operating Subsidiaries generally do not maintain significant levels of
inventory, but instead locate suppliers and the necessary products upon the
receipt of orders. Management of the Operating Subsidiaries has determined
that this policy reduces holding costs and minimizes exposure to price
fluctuations. However, in anticipating favorable market conditions or with
respect to certain common items, the Operating Subsidiaries may maintain
inventory levels in these limited circumstances sufficient to satisfy estimated
demand for one to three months. With respect to the distribution of natural
rubber, due to the seasonal nature of rubber production, the Operating
Subsidiaries stockpile a certain amount of rubber inventory during the peak
production season for sales in those periods with no rubber output.
Pursuant to a Long-Term Sale and Purchase Agreement dated November 5,
1994 (the "Sale and Purchase Agreement"), among the Farming Bureau, HARC and
the Operating Subsidiaries, the Farming Bureau agreed to direct the Hainan
State Farms to sell to HARC and the Operating Subsidiaries on a priority basis,
and HARC and the Operating Subsidiaries have agreed to purchase from the Hainan
State Farms raw natural rubber for sale under the same terms and conditions as
are offered to other purchasers. If HARC or the Operating Subsidiaries are
offered the same quantity and same price for natural rubber from a Hainan State
Farm and a non-state farm, HARC or the Operating Subsidiaries, as the case may
be, must purchase from the Hainan State Farm. If the price offered by the
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<PAGE> 37
Hainan State Farm is higher than that from a non-state farm, HARC or the
Operating Subsidiaries, as the case may be, may purchase from the non-state
farm. Otherwise, there is no condition requiring the purchase of any
particular quantity of raw natural rubber from the Hainan State Farms. The
Sale and Purchase Agreement has a term of 15 years and, subject to applicable
law, may not be terminated except upon the agreement of the parties.
INDUSTRY SEGMENTS
The Operating Subsidiaries are principally engaged in the distribution
of natural rubber and the procurement of materials and supplies in the PRC.
In conformity with Item 101(b) of Regulation S-K, the following table
sets forth information related to Industry Segments (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
- ---------------------------------------------------------------------------------------------------------------------------
1993 1994 1995 1995
---- ---- ---- ----
(Rmb) (Rmb) (Rmb) (US$)
<S> <C> <<C> <C> <C>
Sales to unaffiliated customers
(net of sales tax)
Distribution of natural rubber 1,007,254 1,551,452 1,776,641 213,539
Procurement of materials &
supplies 233,143 98,246 72,880 8,759
--------- --------- --------- -------
1,240,397 1,649,698 1,849,521 222,298
Sales to affiliated customers
(net of sales tax)
Distribution of natural rubber 14,330 28,575 1,630 196
Procurement of materials &
supplies 218,083 76,015 106,092 12,751
--------- --------- --------- -------
232,413 104,590 107,722 12,947
Operating income
Distribution of natural rubber 20,973 19,766 47,188 5,672
Procurement of materials &
supplies 3,841 6,194 1,607 193
--------- --------- --------- -------
24,814 25,960 48,795 5,865
Identifiable assets
Distribution of natural rubber 210,810 223,203 435,664 52,363
Procurement of materials &
supplies 327,474 308,998 231,748 27,855
--------- --------- --------- -------
538,284 532,201 667,412 80,218
</TABLE>
GENERAL
The main business of the Operating Subsidiaries is the purchase and
sale of natural rubber produced in Hainan. The Operating Subsidiaries are the
primary distributors of the natural rubber produced by the Hainan State Farms,
which constitute the largest natural rubber base in China. Hainan State Farms'
natural rubber output was approximately 182,000 tons and 200,000 tons in 1994
and 1995, respectively (a sales value of approximately Rmb2.2 billion (US$264
million) and Rmb2.6 billion (US$312 million) for 1994 and 1995, respectively).
It is anticipated that the aggregate rubber output of the Hainan State Farms
for the next five years will be 1,100,000 tons, and that by the year 2000 the
annual rubber output will reach 230,000 tons, with a sales value of
approximately Rmb3 billion (US$360 million) at current price levels. It is
also anticipated that by the year 2010, the annual rubber output of the Hainan
State Farms will reach 250,000 tons, with a sales value of approximately Rmb3.3
billion (US$397 million) at current price levels.
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<PAGE> 38
In addition, the Operating Subsidiaries engage in the trading of
production materials and supplies and related commodities, such as building and
construction materials; fuels and chemicals, including fertilizers and
pesticides; and other products, including farm equipment and machinery,
automobiles, automobile parts, and electrical appliances; which are connected
with the agricultural production in Hainan. The foregoing materials are key
elements in the continuation of the Hainan State Farms' rubber production.
All of the Operating Subsidiaries' sourcing and trading activities are
divided into (1) State Plan allocations, and (2) free market activities. With
respect to State Plan allocations, the Central Government determines the price
and quantity of the materials and supplies sold to designated end users, and
the Operating Subsidiaries must strictly follow the allocation. However, the
scale of State Plan Allocations is decreasing gradually and currently accounts
for only 20% to 30% of the fertilizers supplied by the Operating Subsidiaries.
All of the other production materials and natural rubber supplied by the
Operating Subsidiaries are provided through free market sales. The price set
forth in the State Plan is such that any profit derived from the sourcing and
trading of fertilizers, if any, is comparatively lower than that derived from
free market sales. With respect to natural rubber and related products,
although they are provided through free market sales, the Operating
Subsidiaries are guaranteed a minimum gross profit margin of 3.5% (before
purchase discount, as discussed hereinbelow) by the Farming Bureau. To the
extent that the gross profit for a particular year is less than this rate, the
Farming Bureau is obligated to pay to HARC or the Operating Subsidiaries the
shortfall.
The combined net income before taxes, minority interests and
reorganization expenses of HARC and the Operating Subsidiaries was Rmb36.32
million (US$4.37 million) in 1993, Rmb43.76 million (US$5.26 million) in 1994
and Rmb48.55 million (US$5.84 million) in 1995.
RUBBER DISTRIBUTION
The Company, through the Operating Subsidiaries, engages in the
marketing and distribution of natural rubber and its complementary products and
materials produced by the Hainan State Farms. Natural rubber occupies a
position of strategic importance in the PRC, comparable to the iron, steel,
coal, and oil industries. Industrial rubber consists of synthetic rubber and
natural rubber, which have similar uses but different characteristics, so the
two are not completely interchangeable. Both types of rubber can be used for
making tires, but heavy duty tires, such as for planes and for some motor
vehicles, must be made of natural rubber.
Natural rubber can only be planted in limited geographical areas in
the world. Today, most of the rubber plantations in the world are in Southeast
and Southern Asia, which in 1994 accounted for 94% of total worldwide rubber
plantation area and 93% of the world's natural rubber output. According to
China Statistical Yearbook 1995, China ranks 4th and 5th in the world in terms
of natural rubber planting area and output, respectively. China's output
accounted for 5.87%, 6.10% and 6.70% of the world's natural rubber output in
1992, 1993 and 1994, respectively. With its geographical location and humid
tropical climate, Hainan province is the most suitable area for planting rubber
trees in China, and Hainan has become the single most important production base
of natural rubber in China, according to Hainan Yearbook 1994.
Since January 1, 1952, the Farming Bureau, which controls one quarter
of the land area in Hainan, has developed the largest natural rubber production
base in China with plantations covering approximately 3.6 million mu
(approximately 620,470 acres or 968 square miles), according to the Hainan
Farming Bureau National Economy and Social Development Statistical Report 1994.
The natural rubber output of the Farming Bureau and the Hainan State
Farms was approximately 182,000 tons and 200,000 tons in 1994 and 1995,
respectively, accounting for approximately 49% and 48% of the total domestic
output in China in 1994 and 1995, respectively. According to the Farming
Bureau's expansion plans and production capacity, it is anticipated that the
aggregate natural rubber produced by the Hainan State Farms for the next five
years will be 1,100,000 tons, and that annual rubber output will reach 230,000
tons in the year 2000 and 250,000 tons in the year 2010.
The Operating Subsidiaries function as affiliated trading partners of
the Farming Bureau and the Hainan State Farms. They purchase raw natural
rubber (both dried and latex) from the Hainan State Farms and resell the raw
natural rubber to customers throughout the PRC. As described above, before
1994, the Farming Bureau generally established the selling price of natural
rubber, based upon then existing market conditions, in order to allow the
Operating Subsidiaries to earn a pre-determined gross profit margin.
Commencing in 1994, however, the Farming Bureau generally ceased establishing
the selling price of natural rubber, and instead allowed the Operating
Subsidiaries to determine the selling price according to market conditions,
subject to a minimum gross profit margin of 3.5% (before purchase discount, as
discussed hereinbelow).
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<PAGE> 39
Since 1993, changes in supply and demand have taken place in the
international natural rubber market. Because of a reduction of the planting
areas in Southeast Asia and the growth of demand for natural rubber in the
world, especially in China, Korea and Vietnam due to the development of the
automobile industry, the price has reached a historical high. According to
statistics provided by the International Natural Rubber Organization, the total
consumption of natural rubber in the world in 1994 was 5.58 million tons, and
production was also 5.58 million tons. The largest consuming country is the
United States of America, followed by China and Japan. The unit price of
natural rubber increased from US$1,400 per ton in 1994 to US$1,600 per ton in
1995. In 1994, the domestic natural rubber consumption in China was 683,500
tons, but its domestic output was only 374,000 tons, according to statistics
provided by the International Natural Rubber Organization and the China
Statistical Yearbook 1995, respectively. The PRC Ministry of Agriculture also
anticipates that demand will exceed supply for some time because of geographic
and weather conditions throughout the China.
SUPPLIERS
The Operating Subsidiaries purchase natural rubber from the 92 farms
comprising the Hainan State Farms, with the value of purchases totalling
approximately Rmb914 million (US$110 million) in 1993, Rmb1,532 million (US$184
million) in 1994, and Rmb1,653 million (US$199 million) in 1995. The single
largest supplier within the Hainan State Farms accounted for approximately 4%
(Rmb34 million, US$4.1 million) of such purchases in 1993, 3% (Rmb49 million,
US$5.9 million) in 1994, and 3% (Rmb57 million, US$6.9 million) in 1995. No
single farm accounted for more than 5% of the Operating Subsidiaries' purchases
of natural rubber in any of the years 1993, 1994, or 1995, but all supplier
farms are controlled under PRC law by the Farming Bureau. The top five
supplier farms accounted for approximately 14% (Rmb128 million, US$15.4
million) of such purchases in 1993, 14% (Rmb218 million, US$26.2 million) in
1994, and 13% (Rmb223 million, US$26.8 million) in 1995. Purchases are
principally made in Renminbi on an open account basis payable within 30 days,
or on a "cash on delivery" basis. As a majority of their purchases are made in
Renminbi, the Operating Subsidiaries have a limited exposure to fluctuations in
exchange rates.
Pursuant to the Sale and Purchase Agreement, the Farming Bureau agreed
to direct the Hainan State Farms to sell to HARC and the Operating Subsidiaries
on a priority basis, and HARC and the Operating Subsidiaries have agreed to
purchase from the Hainan State Farms raw natural rubber for sale under the same
terms and conditions as are offered to other purchasers. If HARC or the
Operating Subsidiaries are offered the same quantity and same price for natural
rubber from a Hainan State Farm and a non-state farm, HARC or the Operating
Subsidiaries, as the case may be, must purchase from the Hainan State Farm. If
the price offered by the Hainan State Farm is higher than that offered by a
non-state farm, HARC or the Operating Subsidiaries, as the case may be, may
purchase from the non-state farm. Otherwise, there is no condition requiring
the purchase of any particular quantity of raw natural rubber from the Hainan
State Farms. The Sale and Purchase Agreement has a term of 15 years and,
subject to applicable law, may not be terminated except upon the agreement of
the parties. The Sale and Purchase Agreement will expire on November 5, 2009.
Pursuant to the Agreement on Rubber Purchase Deposits dated March 30,
1995, the Farming Bureau guarantees the supply of a minimum of 120,000 tons
(the "Guaranteed Quantity") of natural rubber for each of the next three years.
The Operating Subsidiaires are not obligated to purchase the Guaranteed
Quantity. In consideration of this guarantee, the Operating Subsidiaries have
maintained a purchase deposit on a rolling basis equivalent to 15% of the
Guaranteed Quantity multiplied by the average market price of natural rubber
for the previous quarter. In return, a purchase discount is offered to the
Operating Subsidiaries for the purchase of natural rubber from the Hainan State
Farms.
MARKETING
The Hainan State Farms are the dominant suppliers of raw natural
rubber and natural rubber products in China. In 1994, they accounted for
approximately 49% of the annual output of raw natural rubber. Because of the
market position of the Hainan State Farms, the Operating Subsidiaries are the
largest distributors of raw natural rubber and natural rubber products in
China.
The Operating Subsidiaries maintain a strong sales and marketing force
consisting of 61 persons in the natural rubber business. The Operating
Subsidiaries' sales and marketing personnel make regular visits to customers
and to the Hainan State Farms to maintain contacts and monitor requirements.
Currently, all sales and distribution of raw natural rubber and natural rubber
products occur within the PRC. The business operations of the Operating
Subsidiaries are conducted solely within the PRC; consequently, the Company is
solely dependent upon trade in the PRC. The Company does not currently engage
in any export trade from the PRC.
CUSTOMERS
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<PAGE> 40
Sales of natural rubber for 1993, 1994 and 1995 were Rmb1,022 million
(US$123 million), Rmb1,580 million (US$190 million), Rmb1,778 million (US$214
million), respectively. The five largest customers for rubber, in the
aggregate, accounted for approximately 14%, 9% and 19% of the Operating
Subsidiaries' revenue derived from rubber sales for 1993, 1994, and 1995,
respectively. The single largest customer accounted for approximately 5%, 4%
and 7% of such revenue for 1993, 1994, and 1995, respectively.
For the year ended December 31, 1995, the Operating Subsidiaries had a
total of approximately 537 customers for natural rubber and natural rubber
products with only two customers accounting for more than 5% of total sales of
such products. Those two customers were Haikou Tianlong Trading Company and
Haikou Guannan Trading Company, each of which accounted for 7% of total sales
of natural rubber in 1995. No other single customer accounted for more than 2%
of total sales of natural rubber in 1995. Total sales for the year ended
December 31, 1995, were Rmb1,778 million (US$214 million).
SEASONALITY
The geographic and climatic conditions in Hainan are such that natural
rubber production has high and low seasons. Generally, there is no rubber
harvest from January to April. The high season commences in April. Sales of
natural rubber and natural rubber products generally grow in the second quarter
and reach the peak in the third and fourth quarters due primarily to the
increased production of natural rubber. All sales in the first quarter of a
year relate to inventory maintained from the inventory of the prior year. The
high season ends in November. Sales in the last two quarters accounted for
69%, 80% and 71% of the total sales for 1993, 1994, and 1995, respectively.
DISTRIBUTION
The Operating Subsidiaries have their own warehouse facilities and
transportation fleet for both natural rubber and materials consisting of 71
warehouses with a total area of 36,684 square meters, 73 trucks and 325
workers. Some of the natural rubber is shipped to customers by sea freight
from the port of Haikou, Hainan, to other destination ports within the PRC.
The Operating Subsidiaries also transport rubber from the Hainan State Farms to
the port of Zhangjiang, PRC, which operates as a distribution center from where
the natural rubber is delivered to customers by rail to destinations within the
PRC. Some of the natural rubber is also delivered locally in Hainan.
WORKING CAPITAL ITEMS
The Operating Subsidiaries generally grant their purchasers the right
to return substandard natural rubber, as determined by laboratories recognized
by both parties. Sales returns or losses borne by the Operating Subsidiaries
are reimbursed by the farm that supplied the substandard rubber. These sales
returns could potentially impact the working capital levels of the Operating
Subsidiaries if such returns were significant; however, in the past such sales
returns have been insignificant.
Prior to 1994, sales of rubber were made principally on an open
account basis payable within 30 days. Starting in 1994, because of increased
rubber demand, a significant portion of such sales are made on a "cash on
delivery" basis. The Operating Subsidiaries have been working to recover aged
accounts receivable while establishing policies to tighten credit control.
Some of these policies require new customers to place deposits of 5% of the
invoiced value of a purchase upon signing a sales contract or require full
payment on or before delivery for small new customers. In addition, no sales
are made to those customers with long outstanding balances with the Operating
Subsidiaries until past due accounts receivable are settled.
Following the tightening of the credit control policy, customers are
now required to pay the balance of the invoiced value (after deducting the 5%
deposit paid) on delivery. However, in order to maintain good customer
relationships, extended payment terms of between no more than one month may be
granted to certain customers based on their credit and payment history with the
Operating Subsidiaries.
Due to the seasonal nature of rubber production, the Operating
Subsidiaries stockpile a certain amount of rubber inventory during the peak
production season for sales in those periods with no rubber output.
Prior to July, 1992, the Farming Bureau was responsible for financing
the Hainan State Farms during the winter months when there was no rubber
production. In July, 1992, the Operating Subsidiaries began providing
financing to the Hainan State Farms (primarily for working capital and to
purchase materials and supplies). Accordingly, the Operating Subsidiaries
obtain short term bank loans, which are generally secured by guarantees of the
Farming Bureau, to provide such financing. When a rubber purchase is made by
an Operating Subsidiary from a farm which has an outstanding balance in favor
of HARC or the Operating Subsidiary from a prior financing advance, it is
customary practice to credit the purchase price of the rubber against the
balance on the financing account
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<PAGE> 41
of such farm. Neither HARC nor the Operating Subsidiaries are obligated to
provide any future financing advances to any Hainan State Farms. Pursuant to
the Agreement on Rubber Purchase Deposits dated March 30, 1995, the Farming
Bureau guarantees the supply of a minimum of 120,000 tons (the "Guaranteed
Quantity") of natural rubber for each of the next three years. The Operating
Subsidiaires are not obligated to purchase the Guaranteed Quantity. In
consideration of this guarantee, the Operating Subsidiaries have maintained a
purchase deposit on a rolling basis equivalent to 15% of the Guaranteed
Quantity multiplied by the average market price of natural rubber for the
previous quarter. (See Financial Statements and Notes included therein
attached as Appendix A hereto.)
COMPETITORS
There are several companies competing for business in the domestic
natural rubber industry in the PRC. Among the Company's competitors are other
major state-owned rubber producers under the control of different farming
bureaus, with no direct relationship to the Hainan Farming Bureau. The market
share of these rubber producers are generally significantly less than that of
the Farming Bureau. There are also certain small, non-state owned rubber
producers located in the provinces of Hainan, Guangdong, Yunnan, Guangxi, and
Fujian. However, the quantities produced by these non-state owned farms and
individuals are relatively insignificant. According to the China Statistical
Yearbook 1995, the rubber output from Hainan Province ranged from 157,000 tons
to 232,000 tons for the years from 1990 to 1994. According to the Hainan
Farming Bureau National Economy and Social Development Statistical Report, the
rubber output from the Hainan State Farms ranged from 133,000 tons to 182,000
tons for the years from 1990 to 1994. Consequently, the rubber output from
non-state owned enterprises in Hainan Province accounted for 15% to 21% of the
total rubber output for the years 1990 to 1994. The natural rubber production
by other domestic rubber producers is limited by the area of land suitable for
rubber planting in the region. Due to the specific tropical climatic
conditions required for rubber cultivation, the number of rubber producers are
limited and no new rubber producer is expected to enter the market. Thus, the
competition in the industry may be determined by the acquisition of land
suitable for rubber cultivation. Due to the favorable climatic conditions in
Hainan for rubber plantations and the fact that there is still land available
in Hainan that the Farming Bureau can develop into rubber plantations, the
Farming Bureau will likely remain as China's largest natural rubber producer
for the foreseeable future. Domestic consumption for natural rubber has far
exceeded domestic supply, and it is believed that this situation will continue.
According to the China Statistical Yearbook 1995 and statistics provided by the
International Natural Rubber Organization, in 1994 the domestic rubber output
of the PRC and the rubber consumption of the PRC were 374,000 tons and 683,500
tons, respectively. Accordingly, the rubber output of the Farming Bureau in
1994 accounted for approximately 49% of the total domestic output of natural
rubber and satisfied approximately 27% of the domestic consumption. The
Company believes that the Operating Subsidiaries' affiliation with the Farming
Bureau will continue to provide an important competitive advantage for the
Operating Subsidiaries.
ENVIRONMENTAL PROTECTION
Management does not believe that there are any material requirements
under PRC environmental law or regulations applicable to the Operating
Subsidiaries which could have a material adverse effect on the capital
expenditures, including capital expenditures required in order to comply with
environmental laws and regulations, in the rubber distribution segment of the
business of the Operating Subsidiaries.
PROCUREMENT OF MATERIALS AND SUPPLIES
The Company, through the Operating Subsidiaries, also engages in the
procurement of materials and supplies, such as building and construction
materials, fuels and chemicals, including fertilizers and pesticides; and other
products, including farm equipment and machinery, automobiles, automobile
parts, and electrical appliances; which are connected with the agricultural
production in Hainan. In the past, these sourcing and procurement activities
were conducted primarily for the Hainan State Farms. However, the percentage
of such sales to non-affiliates, which has become significant in recent years,
was 52% in 1993, 56% in 1994 and 41% in 1995. The decrease of such sales to
non-affiliates in 1995 was due to the slow down of property and automobile
markets (such customers are non-affiliates) due to the PRC Government's
austerity measures. Sales of fertilizers, pesticides, etc., which are mainly
sold to farms (affiliates) remained strong. Therefore, there were fewer sales
to non-affiliates.
The sourcing and procurement activities generally commence upon the
receipt by an Operating Subsidiary of an order to obtain certain of the various
materials set forth above. Upon such receipt, the Operating Subsidiary
identifies potential suppliers for the required production materials and
obtains quotations from the various suppliers. In order to obtain the most
favorable terms, the Operating Subsidiary will negotiate with many different
suppliers, with pricing and quality being the main points of negotiation.
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<PAGE> 42
The Operating Subsidiaries generally do not maintain significant
levels of inventory, but instead locate suppliers and the necessary products
upon the receipt of orders. Management of the Operating Subsidiaries has
determined that this policy reduces holding costs and minimizes exposure to
price fluctuations. However, in anticipating favorable market conditions or
with respect to certain common items, the Operating Subsidiaries may maintain
inventory levels sufficient to satisfy estimated demand for one to three
months.
Pursuant to the Sale and Purchase Agreement, the Farming Bureau agreed
to direct the Hainan State Farms to purchase all of their requirements of
production materials and other commodities offered by the Operating
Subsidiaries and HARC under the same terms and conditions as are offered by
other suppliers. In the case of production material and other commodities, a
Hainan State Farm requests a price quote for a specified quantity of a
particular item from HARC or the Operating Subsidiaries. Upon receiving the
price quote, the Hainan State Farm can obtain quotes from other suppliers based
on the same quantity of the requested item. The Hainan State Farm must inform
HARC or the Operating Subsidiaries, as the case may be, of the amounts of the
other quotes and, if any of the quotes are lower, HARC or the Operating
Subsidiaries have the right to lower their quote to the level of the competing
quote. In the event that the Operating Subsidiaries are unable to profitably
match the terms offered to the Hainan State Farms by sources other than the
Operating Subsidiaries, the Operating Subsidiaries will be required to sell to
the Hainan State Farms at a loss or forebear from making such sales. If HARC
or an Operating Subsidiary matches the competing quote based upon the same
quantity of the item requested, the Hainan State Farm must purchase the item
from HARC or the applicable Operating Subsidiary. Otherwise, the Hainan State
Farm can purchase the item from the competing supplier. The Sale and Purchase
Agreement has a term of 15 years and, subject to applicable law, may not be
terminated except upon the agreement of the parties. The Sale and Purchase
Agreement will expire on November 5, 2009.
SUPPLIERS
During 1995, the Operating Subsidiaries purchased production materials
from a total of approximately 380 suppliers. The value of the Operating
Subsidiaries' purchases of production materials totaled approximately Rmb562
million in 1993, Rmb130 million in 1994, and Rmb135 million in 1995. The
single largest supplier accounted for approximately 5% (Rmb27 million) of such
purchases in 1993, 13% (Rmb17 million) in 1994, and 11% (Rmb15 million) in
1995. No single supplier accounted for more than 5% of the Operating
Subsidiaries' purchases of production materials in 1993, the two largest
suppliers accounted for 13% and 8%, respectively, of such purchases in 1994,
and the three largest suppliers accounted for 11%, 7% and 6%, respectively, of
such purchases in 1995 (and no other suppliers accounted for more than 5%).
The top five suppliers accounted for approximately 15% (Rmb86 million) of such
purchases in 1993, 29% (Rmb38 million) in 1994, and 26% (Rmb35 million)] in
1995. Purchases are principally made in Renminbi on an open account basis
payable within 30 to 90 days. As a majority of the purchases are made in
Renminbi, the Operating Subsidiaries have limited exposure to fluctuations in
exchange rates.
MARKETING
In accordance with the terms of the Sale and Purchase Agreement, HARC
and the Operating Subsidiaries are the principal suppliers of production
materials to the Farming Bureau and the 92 farms comprising the Hainan State
Farms. The Operating Subsidiaries maintain a sales and marketing team of 206
persons for the procurement business. The sales and marketing team makes
regular visits to the Farming Bureau, the Hainan State Farms and unaffiliated
purchasers in order to maintain contacts and monitor requirements.
Currently, all activities of the Operating Subsidiaries with respect
to production materials and commodities occur within the PRC. The business
operations of the Operating Subsidiaries are conducted solely within the PRC;
consequently, the Company is solely dependent upon trade in the PRC. The
Company does not currently engage in any export trade from the PRC.
CUSTOMERS
Sales of production materials by the Operating Subsidiaries for the
years 1993, 1994, and 1995 totalled approximately Rmb458 million (US$55
million), Rmb174 million (US$21 million), and Rmb179 million (US$22 million),
respectively. The five largest customers for production materials accounted
for approximately 4%, 9%, and 6% of the Operating Subsidiaries' revenue derived
from sales of production materials for 1993, 1994, and 1995, respectively. The
single largest customer accounted for less than 5% of such revenue for each of
1993, 1994 and 1995. The Operating Subsidiaries have a broad customer base and
are not dependent upon any single customer for sales. However, aggregate sales
to affiliates of the Farming Bureau accounted for 48%, 44% and 59% of the
Operating Subsidiaries' revenue derived from sales of production materials for
1993, 1994, and 1995, respectively.
SEASONALITY
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<PAGE> 43
The seasonal fluctuations experienced by the Operating Subsidiaries in
the production materials procurement segment are significantly less severe than
those experienced in connection with the rubber production operations.
However, to the extent that the Operating Subsidiaries may buy goods and
materials related to the rubber industry from suppliers, but sell such goods
and materials on credit to Hainan State Farms, repayment may be affected by the
seasonality of rubber production.
WORKING CAPITAL ITEMS
Sales by the Operating Subsidiaries are principally made in Renminbi.
The Operating Subsidiaries have been working to recover aged accounts
receivable while establishing policies to tighten credit control. In the past,
most of the sales were made on an open account basis payable within 30 days.
The new policies require "cash on delivery" terms for small or new customers.
In addition, no sales are made to those customers with long outstanding
balances with the Operating Subsidiaries until past due accounts receivable are
settled. However, in order to maintain good customer relationships, extended
payment terms of one to two weeks may be granted to certain customers based on
their credit and payment history with the Operating Subsidiaries. No extended
payment terms are granted for more than one month. For sales to the Hainan
State Farms, more flexible payment terms may be allowed depending on credit
history and regularity of purchase orders. Such payment terms may include an
open account basis or the netting of the sales value of materials against the
cost of natural rubber purchases by the Operating Subsidiaries.
COMPETITORS
Generally, as a result of the Sale and Purchase Agreement, HARC and
the Operating Subsidiaries have no major competitors in their primary market in
Hainan Province with respect to the sourcing and procurement of the wide range
of production materials and commodities needed by the Farming Bureau, its
affiliates, and the Hainan State Farms. With respect to other unaffiliated
purchasers, HARC and the Operating Subsidiaries are subject to significant
competition from certain suppliers owned and controlled by the Hainan
Provincial Government and from a number of smaller suppliers of certain of the
individual production materials and commodities in which the Operating
Subsidiaries trade. Management believes that the Operating Subsidiaries'
market share is approximately the same as that of the suppliers owned and
controlled by the Hainan Provincial Government and that the Operating
Subsidiaries and the government-controlled suppliers collectively have a market
share of over 90% with respect to those production materials and commodities
traded by the Operating Subsidiaries.
Listed below are those competitors owned and controlled by the Hainan
Provincial Government and the products with which they compete with the
Operating Subsidiaries:
<TABLE>
<S> <C>
Hainan Provincial Metals & Metals, building and construction materials
Building Materials Company
Hainan Provincial Petroleum Oils (diesel oil, gasoline and heavy oil)
Company
Hainan Provincial Production Pesticides and fertilizers
Materials Company
Hainan Provincial Automobiles Automobiles and automobile parts
Trading Company
Hainan Provincial Farm Farm equipment
Equipment Company
Hainan Provincial Fuels & Fuels and chemicals (including coal)
Chemical Company
Hainan Provincial Mechanical Electrical and mechanical equipment,
& Electrical Company appliances and parts]
</TABLE>
The price and quality of products sold by the competitors are similar
to that of the comparable products sold by the Operating Subsidiaries.
However, the Operating Subsidiaries can usually arrange more prompt fulfillment
of orders and shipment of goods due to their warehouse facilities and
transportation fleet. Also, the Operating Subsidiaries can often offer more
flexible payment terms than their competitors with respect to sales to the
Hainan State Farms.
-14-
<PAGE> 44
ENVIRONMENTAL PROTECTION
Due to the business nature of the Operating Subsidiaries in the
procurement segment, management does not believe that there are any material
requirements under PRC environmental law or regulations applicable to the
Operating Subsidiaries which could have a material adverse effect on the
capital expenditures, including capital expenditures required in order to
comply with environmental laws and regulation, in the procurement segment of
the business of the Operating Subsidiaries.
PRC LEGAL SYSTEM
The PRC is still in the process of developing a comprehensive system
of laws. A significant number of laws and regulations dealing, in particular,
with economic matters and foreign investment, protection of intellectual
property, taxation, technology transfer and trade have been promulgated since
1978 when the PRC first embarked on its economic reform policy. The
Constitution was amended in December 1982 to authorize foreign investment and
to guarantee the "lawful rights and interests" of foreign investors in the PRC.
National laws in the PRC are promulgated by the National People's
Congress ("NPC"). However, when the NPC is not in session, its Standing
Committee promulgates laws and the NPC acts as a rubber stamp. The State
Council, certain of the entities affiliated with the State Council and people's
congresses at the provincial and municipal levels are also vested with the
power to promulgate administrative measures, rules and regulations having the
force of law.
The legal system in the PRC is based on written statutes, and decided
cases do not constitute binding precedents, although such cases are sometimes
referred to for guidance. The main legislation governing the judicial system
is The Law of the People's Republic of China concerning the Organization of the
Judicial System, which came into effect on July 1, 1979 and was amended on
September 2, 1983. The main legislation governing civil procedure is The Law
of the People's Republic of China on Civil Procedure (the "Civil Procedure
Law") which came into effect on April 5, 1991.
All foreign individuals, enterprises and other entities are given the
same rights and obligations as PRC individuals, enterprises and other entities
in instituting or defending proceedings in courts. If, however, the rights and
obligations of PRC individuals, enterprises or other entities to institute or
defend legal proceedings are subject to any restriction in any foreign
jurisdiction, then reciprocal restrictions may be imposed by PRC courts on the
rights and obligations of the individuals, enterprises and other entities of
such jurisdictions to institute or defend legal proceedings in the PRC.
Foreign individuals, enterprises and other entities who wish to retain legal
counsel in instituting or defending any proceedings in a PRC court must retain
lawyers qualified in the PRC.
All civil cases are decided by the court on the basis of a majority
vote and are subject to a two-tier procedure, with cases being heard by a court
of first instance and then subject to appeal to an appellate court. Courts in
the PRC are divided into four levels: the Supreme People's Court, the High
People's Court, the Intermediate People's Court and the Elementary People's
Court. At each level, there is a criminal division, a civil division, an
economic division and an administrative division. Cases involving foreigners
are usually first brought at the intermediate level. The PRC also has
specialty courts which handle maritime military, maritime, railroad, forestry
and traffic matters. The Supreme People's Court is the highest judicial
establishment in the PRC. It is responsible for supervising all other courts.
It has appellate jurisdiction over High People's Courts and specialty courts,
and original jurisdiction in limited circumstances. It also adjudicates
certain special criminal prosecutions. In case of uncertainty in relation to
the interpretation of any law, rule or regulation, the Supreme People's Court
may be asked to provide an opinion on the interpretation of such law, rule or
regulation.
Most judges in the PRC are members of the Chinese Communist Party (the
"CCP"), and the party expects judges to carry out its policies. In an attempt
to promote judicial independence, a long-standing "examination and approval"
system of review by the CCP, which was used in cases involving the death
penalty, foreigners and certain important decisions, was officially abolished
in 1979. However, review of decisions by the party is still common.
If a legally binding judgment or ruling is given by a PRC court, but
the party against whom such judgment or ruling is to be enforced is not present
or does not have any assets in the PRC, the person seeking enforcement may
apply to the appropriate foreign court for recognition and enforcement of such
judgment or ruling. Alternatively, where there is an applicable judicial
assistance treaty or other arrangement for reciprocal enforcement of judgments
between the PRC and the country in which the PRC judgment or ruling is sought
to be enforced, the PRC court may be asked to seek the enforcement of such
judgment or ruling directly through the courts in such foreign country.
-15-
<PAGE> 45
Similarly, if a party requests a PRC court to recognize or enforce a
judgment or ruling given by a foreign court, such judgment or ruling will be
recognized and enforced only where there is an applicable judicial assistance
treaty or other arrangement for reciprocal enforcement of judgements between
the PRC and the country of the court by which such judgment or ruling is given.
Where there is an applicable judicial assistance treaty, a foreign court may
directly request a PRC court to recognize and enforce such a judgment. The
enforcement of such judgment or ruling, however, must not violate the public
security, state sovereignty or basic principles of the law of the PRC or
contradict the public interest of the PRC. If it is necessary to enforce such
judgment or ruling, the PRC court will issue an enforcement order and will
proceed with enforcement in accordance with PRC law.
To date, the PRC has concluded judicial assistance treaties with only
a few countries, including Belgium, France, Poland, Mongolia, Ukraine, Romania,
Spain, Italy, Russia, Cuba, Thailand, Egypt, Khazakstan, Belarus, Turkey,
Greece and Bulgaria.
Foreign arbitral awards may be enforced in the PRC in accordance with
the Civil Procedure Law, which provides that an application for enforcement
shall be submitted to the Intermediate Peoples Court of the place where the
party against whom enforcement is sought is domiciled or where such party's
property is located. Application for enforcement shall be handled pursuant to
international treaties to which the PRC is a party, most importantly the
Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the
"New York Convention"), to which the PRC acceded in 1987. As of September 20,
1993, 129 states and territories were members of the New York Convention,
including the U.S. and Hong Kong, to which Great Britain extended application
of the Convention pursuant to its own accession.
There is no express requirement in the Civil procedure Law, as in the
case of foreign court judgments and rulings, that foreign arbitral awards which
are brought for enforcement in the PRC must not violate the public security,
state sovereignty or basic principles of the law of the PRC or contradict the
public interest of the PRC. However, the New York Convention does permit a PRC
court to refuse recognition and enforcement of a foreign arbitral course on the
grounds that doing so would be contrary to the public policy of the PRC.
Nonetheless, the Civil Procedure Law and the New York Convention allow PRC
courts significantly less basis for rejecting an application or enforcement of
a foreign arbitral award than exists in the case of foreign court judgments or
rulings. A consistent record of enforcement of foreign arbitral awards,
however, has yet to develop.
The China International Economic and Trade Arbitration Commission
("CIETAC"), established in Beijing under the auspices of the China Council for
the Promotion of International Trade, is one of two domestic arbitration
organizations in the PRC charged with arbitrating foreign-related disputes.
Under the new CIETAC arbitration rules, which came into effect on June 1, 1994,
CIETAC has jurisdiction over any dispute arising from "international or
external economic and trade transactions" with respect to which an arbitration
agreement selecting CIETAC arbitration has been reached. The other arbitration
organization exclusively arbitrates foreign-related maritime disputes.
The CIETAC rules provide that an award rendered by a CIETAC tribunal
shall be final and binding on the parties. The Civil Procedure Law also
provides that a PRC court may only refuse to enforce a CIETAC final award in
the event of procedural errors relating to the jurisdiction of CIETAC over a
given dispute or the failure by an arbitration tribunal to abide by CIETAC
rules, and may also deny execution of the award in the event that it determines
that doing so would be against the "public interest".
Although most arbitrations are conducted in Beijing, parties to a
dispute may agree that the dispute be heard under the auspices of either of the
two CIETAC sub-commissions established in Shenzhen and Shanghai. The parties
may agree to appoint a single arbitrator to arbitrate a dispute, but normally
three arbitrators form the arbitration panel. Each party selects one
arbitrator and the chairman of CIETAC selects the third, who acts as chairman
of the tribunal. Arbitrators must be selected from a panel of arbitrators
maintained by CIETAC. The panel of arbitrators currently comprises 296
arbitrators, of which approximately one-third are either Hong Kong or foreign
individuals. The CIETAC arbitration rules also describe grounds for
challenging arbitrators.
In deciding the substantive aspects of a dispute, the CIETAC
arbitration tribunal must look to the governing law of the contract. PRC
foreign economic contract law permits the parties to choose foreign or PRC law
as the governing law in most cases. In the event that the parties have not
chosen a governing law, PRC choice of law rules provide for the selection of
the law which has the closest connection to the subject matter of the dispute.
The activities of HARC and the Operating Subsidiaries in China are by
law subject, in some cases, to administrative review and approval by various
national, provincial, and local agencies of the Chinese government. While
China has promulgated an Administrative Procedure Law permitting redress to the
courts with respect to certain administrative actions, this law appears to be
largely untested in this context. Although the Company believes that the
support of local, provincial, and national governmental entities benefits the
Company's operations in connection
-16-
<PAGE> 46
with administrative reviews and receiving approvals, there can be no assurance
that such approvals, when necessary or advisable, will be forthcoming.
[Item 2] PROPERTIES
The Company does not own any real property with respect to its
operations. The headquarters of HARC, the warehouse and the other facilities
of the Operating Subsidiaries are all located in Hainan Province in the PRC.
HARC and the Operating Subsidiaries use warehouse and other facilities
consisting of a total gross area of approximately 37,000 square meters, and
office space consisting of a total gross area of approximately 12,000 square
meters. As is typical in the PRC, the PRC government owns all of the land on
which the improvements are situated. The local PRC governmental authorities in
Hainan Province granted land use rights with respect to such land for an
indefinite term to two related companies owned and controlled by the Farming
Bureau. The rights of HARC and the Operating Subsidiaries to use the land on
which the warehouse and other facilities are situated are subject to the rights
of those two companies.
Pursuant to an Agreement on Service and Cooperation dated November 5,
1994, the Farming Bureau has granted to HARC the right to occupy and use a
portion of the land and the improvements situated thereon and, in consideration
therefor, HARC has agreed to assume the payment of the related land use taxes
attributable to such land. The term of that agreement is concurrent with the
existence of HARC, which is initially 50 years and is subject to extension
thereafter upon agreement of HARC's shareholders and the relevant approval
authorities. The two related companies have also executed agreements endorsing
the Agreement on Service and Cooperation with respect to the rights of HARC and
the Operating Subsidiaries to use the land on which the warehouse and other
facilities are situated, thereby joining the Farming Bureau in the granting of
the land use rights to HARC.
The Farming Bureau has also entered into a rental agreement with HARC
with respect to the rental of a portion consisting of 532 square meters of a
building located in Haikou City, PRC, in which HARC's corporate headquarters
are located. Such rental agreement is for a period of 10 years at an annual
rental of Rmb170,240 payable in equal semi-annual installments. The rental
agreement further provides that HARC shall be responsible for certain costs and
expenses in connection with its use of the property.
[Item 3] LEGAL PROCEEDINGS
In the opinion of management, there are no material legal proceedings
pending or threatened against the Company or any of its subsidiaries as of
December 31, 1995.
[Item 4] SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS
During the fourth quarter of the Company's fiscal year ended December
31, 1995, no matters were submitted to a vote of security holders of the
Company through the solicitation of proxies or otherwise.
[PART II]
[Item 5] MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is quoted on the electronic inter-dealer
quotation system operated by The Nasdaq Stock Market, Inc. ("The Nasdaq Stock
Market"), a subsidiary of the National Association of Securities Dealers, Inc.
("NASD"), in the category of Small Cap Issues. The Company's Common Stock has
been traded since August 7, 1995, on The Nasdaq Stock Market under the symbol
"CHRB." Prior to such date, the Company's Common Stock was traded in the
over-the counter market on the OTC Bulletin Board (the "Bulletin Board")
operated by the NASD under the symbol "CEVL." Until August 7, 1995, there was
only a limited trading market for the Company's Common Stock. The following
table sets forth the high and low bid prices for the Company's Common
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<PAGE> 47
Stock as reported by The Nasdaq Stock Market for that period during the fiscal
quarter ended September 30, 1995, during which high and low bid quotations were
reported, and for the remainder of the fiscal year ended December 31, 1995.
The bid prices are inter-dealer prices, without retail markup, markdown or
commission, and may not necessarily reflect actual transactions. All of the
below quotations were obtained from the monthly statistical report provided to
the Company by The Nasdaq Stock Market.
<TABLE>
<CAPTION>
Period High Bid Low Bid
------- -------- -------
<S> <C> <C>
1995 Fiscal Year, quarter ended:
September 30, 1995 . . . . . . . $ 5.50 $3.50
December 31, 1995 . . . . . . . $6.875 $5.00
</TABLE>
On March 29, 1996, there were 103 holders of record of the Company's
Common Stock.
The Company has not paid any dividends with respect to its Common
Stock and has no present plan to pay any dividends in the foreseeable future.
The Company intends to retain its earnings to support the growth and expansion
of its business.
Any dividends paid in the future by the Company will be paid at the
discretion of the Company's Board of Directors and will be dependent upon
distributions, if any, made by the Operating Subsidiaries through HARC to the
Company's wholly-owned subsidiary, Billion Luck. Applicable PRC law and HARC's
Articles of Association (the "Articles") require that, before HARC, as a
limited joint stock company, distributes profits to investors, it must (1)
satisfy all taxes; (2) provide for all losses incurred in previous years; and
(3) allocate a specified percentage of remaining profits to each of the
following: a surplus reserve (in the amount of 10% of such remaining profits),
a collective welfare fund (in the amount of 10% of such remaining profits), and
an incentive fund (in an amount between 5% and 10% of such remaining profits).
The Articles provide that the foregoing may be adjusted by the HARC'S board of
directors based upon HARC's business performance and development needs, subject
to the approval of HARC's shareholders. Distributions of profits by the
Operating Subsidiaries to HARC, and by HARC to Billion Luck are required to be
pro rata in proportion to such party's investment in such company. In addition
to the foregoing, any future determination to pay a dividend to holders of
shares of Common Stock will depend on the Company's results of operations, its
financial condition and other factors deemed relevant by the Board of
Directors. Since the acquisition of Billion Luck by the Company in December,
1994, the Company has not received any distributions from any of its
subsidiaries and has not made any distributions to its shareholders.
[Item 6] SELECTED FINANCIAL DATA
The following table sets forth selected financial data of the Company
and its subsidiaries. The selected consolidated financial data in the table
for the Company's fiscal year ended December 31, 1995, are derived from the
consolidated financial information included elsewhere herein. The selected pro
forma financial data in the table for the Company's fiscal years ended December
31, 1993 and December 31, 1994, are derived from the unaudited pro forma
consolidated financial information included elsewhere herein. The selected
combined financial data in the table for the Company's fiscal year ended
December 31, 1992, are derived from the combined financial statements of First
Supply and Second Supply, as adjusted for pro forma 44% minority interests in
HARC and the Operating Subsidiaries and PRC income taxes at 15%. The data
should be read in conjunction with "Management's Discussion and Analysis of
Results of Operations and Financial Condition," the Consolidated Financial
Statements of the Company and related Notes thereto, the Combined Financial
Statements of the Operating Subsidiaries, the unaudited pro forma consolidated
financial information, and other financial information included elsewhere
herein.
<TABLE>
<CAPTION>
In Thousands, Except Per Share Amounts
Year Ended December 31,
INCOME STATEMENT 1992 1993 1994 1995 1995
DATA (Rmb) (Rmb) (Rmb) (Rmb) (U.S. $)
<S> <C> <C> <C> <C> <C>
Sales 1,227,208 1,479,201 1,754,288 1,957,243 235,246
Sales tax (3,976) (6,391) - -
--------- --------- --------- --------- ---------
Net sales 1,223,232 1,472,810 1,754,288 1,957,243 235,246
</TABLE>
-18-
<PAGE> 48
<TABLE>
<CAPTION>
In Thousands, Except Per Share Amounts
Year Ended December 31,
INCOME STATEMENT DATA 1992 1993 1994 1995 1995
(Rmb) (Rmb) (Rmb) (Rmb) (U.S. $)
<S> <C> <C> <C> <C> <C>
Cost of sales (1,180,291) (1,421,268) (1,686,944) (1,851,186) (222,498)
Depreciation of fixed
assets (1,136) (1,410) (1,981) (2,820) (339)
Selling and
administrative
expenses (16,225) (25,318) (39,403) (54,442) (6,544)
----------- ---------- ---------- ---------- --------
Operating income 25,580 24,814 25,960 48,795 5,865
OTHER INCOME/
(EXPENSE):
Financial
income/(expense), net (932) (1,737) 9,613 (33,212) (3,992)
Reorganization
expenses - (3,029) - - -
Other income 5,551 13,238 8,216 28,654 3,444
----------- ---------- ---------- ---------- --------
Income before income
taxes 30,199 33,286 43,789 44,237 5,317
Income taxes (4,530) (5,447) (6,564) (6,909) (830)
----------- ---------- ---------- ---------- --------
Net income before
minority interests 25,669 27,839 37,225 37,328 4,487
Minority interests (11,294) (13,582) (16,341) (18,153) (2,182)
----------- ---------- ---------- ---------- --------
Net income after
minority interests 14,375 14,257 20,884 19,175 2,305
=========== ========== ========== ========== ========
Earnings per share 1.20 1.19 1.74 1.56 0.187
==========================================================================
OTHER FINANCIAL DATA
Income before income
taxes, minority
interests, depreciation
and amortization 31,335 34,696 45,770 47,057 5,656
==========================================================================
BALANCE SHEET DATA
Working capital 16,252 5,256 65,808 143,986 17,306
Long term debt - - 54,075 - -
Total assets 557,489 538,284 533,305 668,488 80,347
Equity 16,153 17,395 13,194 104,449 12,554
</TABLE>
[Item 7] MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The following discussion should be read in conjunction with the
Consolidated Financial Statements of the Company and related Notes thereto, the
unaudited pro forma consolidated financial information, the combined financial
statements of the Operating Subsidiaries and other financial information
included elsewhere herein. The financial statements of the Company are
prepared in conformity with U.S. GAAP.
-19-
<PAGE> 49
OVERVIEW
THE COMPANY
The Company is a Nevada holding company whose only significant asset
is a wholly-owned British Virgin Islands subsidiary, Billion Luck, which owns a
56% interest in HARC, a limited liability joint stock company organized in the
PRC which, through the Operating Subsidiaries, markets and distributes natural
rubber and rubber products produced by the Hainan State Farms and non-state
farms in the PRC, sources building and production materials, chemicals, farm
equipment and machinery, automobiles and other commodities for use primarily by
the Hainan State Farms and other unaffiliated customers and trades in natural
rubber commodities futures contracts. Accordingly, the Company will derive its
revenues from the distributions paid to the Company through Billion Luck by
HARC resulting from distributions paid by the Operating Subsidiaries. HARC
pays distributions to its shareholders in accordance with their percentage
interests as follows: Billion Luck (56%), Guilinyang Farm (5%) and Farming
Bureau (39%).
The Statements under "Results of Operations" and "Liquidity and
Capital Resources" relate to the operations and condition of the Company and
its subsidiaries.
The Operating Subsidiaries were originally established as state-owned
enterprises in the PRC by the Farming Bureau, a division of the Ministry of
Agriculture of PRC. HARC was established on June 28, 1994, to act as the
holding company of the Operating Subsidiaries. The Operating Subsidiaries
principally engage in the marketing and distribution of raw natural rubber
produced by the Hainan State Farms and non-state farms, and in the trading of
natural rubber commodities futures contracts to hedge the price risk associated
with certain firm commitments for the purchase of natural rubber. As
opportunities arise, the Operating Subsidiaries also enter into natural rubber
commodities futures contracts that are not specific hedges, in anticipation of
a rise or fall in the price of natural rubber, based on their knowledge of the
supply and demand situation with respect to natural rubber in the PRC. They
also procure certain production materials and supplies which include building
materials, fertilizers, fuels, chemicals, farm equipment and machinery,
automobiles, automobile parts and electrical appliances for the Farming Bureau,
the Hainan State Farms and other unaffiliated customers.
Prior to 1994, selling prices of natural rubber were generally set by
the Farming Bureau in order to control the gross profit margin earned by the
Operating Subsidiaries. Commencing in 1994, however, the Farming Bureau
generally ceased establishing the selling price of natural rubber, and instead
allowed Operating Subsidiaries to determine the selling price according to
market conditions, subject to a minimum gross profit margin of 3.5% (before the
purchase discount, as discussed hereinbelow) on natural rubber purchased from
the Hainan State Farms. Generally, materials and supplies are sold at a higher
profit margin than that of natural rubber. The primary cost of operating the
business is the materials cost of natural rubber and other materials and
supplies, as well as selling and administrative expenses.
Pursuant to the Agreement on Rubber Purchase Deposits dated March 30,
1995, the Farming Bureau guarantees the supply of a minimum of 120,000 tons
(the "Guaranteed Quantity") of natural rubber for each of the next three years.
The Operating Subsidiaries are not obligated to purchase the Guaranteed
Quantity. As consideration for this guarantee, the Operating Subsidiaries have
maintained a purchase deposit on a rolling basis equivalent to 15% of the
Guaranteed Quantity multiplied by the average market price of natural rubber
for the previous quarter. In return, a purchase discount is offered to the
Operating Subsidiaries for the purchase of natural rubber from the Hainan State
Farms.
RESULTS OF OPERATIONS
The following table shows the selected audited consolidated income
statement data of the Company and its subsidiaries for the fiscal year ended
December 31, 1995, and the selected unaudited pro forma consolidated income
statements data of the Company and its subsidiaries for the fiscal years ended
December 31, 1993 and 1994. The data should be read in conjunction with the
Consolidated Financial Statements of the Company and related Notes thereto, the
unaudited pro forma consolidated financial information and other financial
information elsewhere therein.:
<TABLE>
<CAPTION>
(In thousands)
- ------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
<S> <C> <C> <C>
1993 1994 1995 1995
(Rmb) (Rmb) (Rmb) (U.S. $)
</TABLE>
-20-
<PAGE> 50
<TABLE>
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales:
Distribution of natural rubber 1,021,584 1,580,027 1,778,271 213,735
Procurement of materials and supplies 457,617 174,261 178,972 21,511
--------- --------- --------- -------
1,479,201 1,754,288 1,957,243 235,246
========= ========= ========= =======
12,748
Gross profit (excluding sales tax) 57,933 67,344 106,057 5.4%
Gross profit margin 3.9% 3.8% 5.4%
5,317
Income before income taxes 33,286 43,789 44,237 (830)
Income taxes (5,447) (6,564) (6,909) -------
---------- ---------- ----------
4,487
=======
Net income before minority interests 27,839 37,225 37,328 (2,182)
========= ========= ========= -------
Minority interests (13,582) (16,341) (18,153) 2,305
---------- ---------- ---------- =======
Net income after minority interests 14,257 20,884 19,175
========= ========= =========
</TABLE>
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
SALES AND GROSS PROFIT
For the year ended December 31, 1995, total turnover was Rmb1,957
million compared with Rmb1,754 million for the corresponding period in 1994.
This indicates a rise in sales by Rmb203 million, representing an increase of
11.6% as compared with the corresponding period last year.
The increase in sales was mainly the result of an increase in natural
rubber sales of Rmb198 million or 12.5% over last year, while sales of
materials and supplies remained approximately unchanged as compared to last
year.
The increase in rubber sales was mainly due to the increase in sales
quantity from 130,000 tons in 1994 to 138,000 tons in 1995, which was in line
with a general increase in demand for natural rubber in the PRC. In addition,
the increase in the average natural rubber selling price from approximately
Rmb12,000 per ton in 1994 to Rmb13,000 per ton in 1995 also contributed to the
overall increase in rubber sales.
The proportion of materials and supplies sales to total sales remained
low as a result of the sustained effect of the macroeconomic austerity measures
introduced by the PRC government in late 1993, which has caused a sharp
decrease in sales of production materials since late 1993.
The increase in gross profit margin was mainly due to the increase in
the gross profit margin of natural rubber sales from 3.4% in 1994 to 5.3% in
1995. This increase was mainly the result of purchase discounts of Rmb31.2
million received from farms pursuant to the Agreement on Rubber Purchase
Deposits among the Farming Bureau, First Supply, Second Supply and HARC dated
March 30, 1995. There were no purchase discounts before March 30, 1995.
SELLING AND ADMINISTRATIVE EXPENSES
Selling and administrative expenses consisted mainly of wages and
salaries, staff welfare, printing and stationery, pension contributions,
entertainment, professional fees, repairs and maintenance, travel expenses and
outward freight charges.
Selling and administrative expenses for the year ended December 31,
1995 were Rmb54.4 million compared with Rmb39.4 million for that of 1994,
representing an increase of 38%. The increase was mainly due to increases in
salaries and staff welfare expenses, which amounted to Rmb4.3 million,
increases in entertainment and office expenses, which amounted to Rmb1.7
million, and other miscellaneous expenses resulting from an increase in the
number of employees and inflation. The increase also resulted from an increase
in freight expenses due to increased sales volume.
In addition, more legal and professional expenses and administrative
expenses were incurred relating to the Company's headquarters in Hainan and
Hong Kong.
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<PAGE> 51
INTEREST INCOME/EXPENSES
Interest expenses were derived from the short term bank loans borrowed
by the Operating Subsidiaries which were mainly used to finance the rubber
purchase deposits paid to the Hainan State Farms and the working capital needs
of the Operating Subsidiaries. Interest income consisted of interest earned on
bank deposits and interest on advances to the Hainan State Farms, the Farming
Bureau and other related companies.
Interest expenses increased by Rmb4.9 million, or 10.4%, from Rmb47.5
million for the year ended December 31, 1994, to Rmb52.4 million for the
corresponding period in 1995. The increase was due principally to an increase
in the bank loan interest rate since mid-1995.
Interest income decreased by Rmb37.1 million, or 66.6% from Rmb55.6
million for the year ended December 31, 1994, to Rmb18.5 million for the
corresponding period in 1995. The decrease was due mainly to the sharp decline
in financing to the Hainan State Farms after the Agreement on Rubber Purchase
Deposits, pursuant to which 15% purchase deposits have been maintained.
OTHER INCOME
Other income increased by Rmb20.5 million, from Rmb8.2 million for the
year ended December 31, 1994, to Rmb28.7 million for the corresponding period
in 1995. The increase was primarily due to an increase in net gains on trading
of natural rubber futures contracts and an increase in management fees income.
The Operating Subsidiaries principally engage in the marketing and
distribution of natural rubber, and they engage in the trading of natural
rubber commodities futures contracts to hedge the price risk associated with
certain firm commitments for the purchase of natural rubber. However, as
opportunities arise, the Operating Subsidiaries also enter into natural rubber
commodities futures contracts that are not specific hedges, in anticipation of
a rise or fall in the price of natural rubber, based on their knowledge of the
supply and demand situation with respect to natural rubber in the PRC. For the
year ended December 31, 1995, the Operating Subsidiaries realized a net gain on
such transactions of Rmb10.6 million, which was classified as Other Income.
For the year ended December 31, 1995, management fees of Rmb3,000 were
charged to two companies owned and controlled by the Farming Bureau for their
share of the Operating Subsidiaries' administrative expenses and for the use of
the Operating Subsidiaries' office equipment, warehouse and staff.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
SALES AND GROSS PROFIT
For the year ended December 31, 1994, total turnover was Rmb1,754
million compared with Rmb1,479 million for the corresponding period in 1993.
This indicates a rise in sales by Rmb275 million, representing an increase of
18.6% as compared with the corresponding period last year.
As far as the sales of rubber are concerned, they increased by Rmb558
million or 54.7% as compared with the corresponding period last year. The
increase was mainly due to the worldwide contraction in the supply of rubber in
1994 with demand grows continuously. The unit price of rubber has risen to a
historical high of Rmb15,000 per ton. The average unit price of domestic
rubber for 1994 was Rmb12,000 compared with that of Rmb7,300 in 1993. This
accounted for the growth in sales of rubber for the year ended December 31,
1994.
Turnover for production materials for the year ended December 31,
1994, was Rmb174 million compared with Rmb458 million in the corresponding
period last year, representing a decrease of Rmb284 million, or 62% as compared
with last year. The decrease was mainly attributed to the drastic fall in the
sales of production materials, in particular, the building materials, due to
the nationwide contraction in capital investment as a result of the
implementation of a series of austerity measures by the central government to
combat inflation. The greatest impact of the measures was on the real estate
market which was further worsened by the introduction of the new property gain
tax system. The effect of decrease in turnover for production materials on
total turnover was to a certain extent eliminated by the rise in turnover of
rubber.
In the past, the selling prices of rubber were set by the Farming
Bureau in order to allow a pre-determined profit margin. Commencing in 1994,
the selling prices were allowed to fluctuate according to market demand and
supply, subject to minimum gross profit margin of 3.5% with respect to natural
rubber purchased from the Hainan State Farms. In 1994, an overall gross profit
margin of 3.8% was generated. In 1993, a higher gross profit margin of 3.9%
was generated. The higher gross profit margin was due mainly to a large
quantity of rubber inventory which
-22-
<PAGE> 52
was previously purchased at lower prices and was on hand at the end of 1992.
This inventory was then sold in 1993 at the higher prevailing selling price as
determined by the Farming Bureau.
SELLING AND ADMINISTRATIVE EXPENSES
Selling and administrative expenses for the year ended December 31,
1994 were Rmb39.4 million compared with Rmb25.3 million for that of 1993,
representing an increase of 56%. The increase was mainly due to increases in
salaries and staff welfare expenses, amounted to Rmb8 million, and increases in
miscellaneous expenses due to inflation and increases in the number of
divisions of the Operating Subsidiaries, which amounted to Rmb5 million.
INTEREST INCOME/EXPENSES
Interest expenses were derived from the short term bank loans borrowed
by the Operating Subsidiaries which were mainly used to finance the working
capital needs of the Hainan State Farms. Interest income were derived from the
provision of funds to the Hainan State Farms through the current accounts with
the Hainan State Farms.
Interest expenses increased by Rmb3.3 million, or 7.5%, to Rmb47.5
million for the year ended December 31, 1994, from Rmb44.2 million for the
corresponding period in 1993. The increase is due principally to an increase
in the interest rate from the second half of 1993 forward and an increase in
the bank loan for the financing of the working capital.
Interest income increased by Rmb11 million, or 24.7% to Rmb55.6
million for the year ended December 31, 1994, from Rmb44.6 million for the
corresponding period in 1993. Interest income increased more than the interest
expenses because of the bank interest earned on the cash contribution of Rmb56
million from Billion Luck to HARC and the penalty interest charged on overdue
accounts receivable balances.
LIQUIDITY AND CAPITAL RESOURCES
The Operating Subsidiaries' primary liquidity needs are to fund
accounts receivable, inventories, rubber purchase deposits and, to a lesser
extent, to expand business operations. The Operating Subsidiaries have
financed their working capital requirements through a combination of internally
generated cash and short term bank borrowing.
Net cash provided by/(used in) operating activities was Rmb458
million, Rmb118 million and (Rmb119 million) in fiscal 1993, 1994 and 1995,
respectively. Net cash flows from the Operating Subsidiaries' operating
activities are attributable to the Operating Subsidiaries' income and changes
in operating assets and liabilities. The substantial increase in cash used in
operating activities was mainly due to the increase in purchase deposits paid
to Hainan State Farms pursuant to the Agreement on Rubber Purchase Deposits and
to the increase in inventory held at the year end in anticipation of a higher
selling price for natural rubber during the non-harvest season in early 1996.
The Operating Subsidiaries have outstanding bank loans with Hainan
Province Agricultural Bank - Sales Division, and Haikou City Agricultural Bank
- - Xiuyin Sub-Branch. These loans amounted to Rmb293 million as at December 31,
1995, bearing a weighted average interest rate of 18.25% per annum. The bank
loans are generally secured by a guarantee given by the Farming Bureau and
mature not more than one year after such loans are originally made. Prior to
mid-1992, the Farming Bureau generally undertook the financing obligations with
respect to the Hainan State Farms and, therefore, the bank loans of the
Operating Subsidiaries were insignificant. Afterwards, large amounts of funds
from bank loans have been borrowed by the Operating Subsidiaries which are used
to finance the Hainan State Farms' operation and to finance the sale of
production materials to the Hainan State Farms. On March 30, 1995, HARC, First
Supply and Second Supply entered into an agreement with the Farming Bureau
pursuant to which the Farming Bureau guarantees the supply of a minimum of
120,000 tons (the "Guaranteed Quantity") of natural rubber for each of the
following three years. The Operating Subsidiaries are not obligated to
purchase the Guaranteed Quantity. In consideration of this guarantee, the
Operating Subsidiaries have maintained a purchase deposit on a rolling basis
which is equivalent to the Guaranteed Quantity multiplied by the average market
price for natural rubber for the previous quarter. In return, a purchase
discount is offered to the Operating Subsidiaries for the purchase of natural
rubber from the Hainan State Farms.
The Farming Bureau has guaranteed the availability of alternative
financing for the Operating Subsidiaries to meet their liabilities in the event
that the banks demand repayment of their outstanding loans, and it has
guaranteed the recoverability of current accounts receivable from the Hainan
State Farms and other related companies controlled and owned by the Farming
Bureau.
-23-
<PAGE> 53
The Operating Subsidiaries also obtained short-term advances,
amounting to Rmb87 million (US$10 million), from the Chinese Commodities
Futures Exchange Inc. ("CCFE") for the purchase of natural rubber. CCFE is the
sole authorized futures exchange in the PRC for the trading of natural rubber
commodities futures. The balance was unsecured, was interest-free, had no
fixed terms of repayment, and was repaid in 1996.
The Company believes that the net proceeds from its capital raising
efforts, together with the internally generated funds, will be sufficient to
satisfy its anticipated working capital needs for at least the next 12 months.
INFLATION
Inflation has historically not had a material effect on the Operating
Subsidiaries' operations. When the price of rubber or production materials has
increased, these costs historically have been passed on to the customers.
Furthermore, because the Operating Subsidiaries do not have either long term
supply contracts or long term contracts with customers, prices are quoted based
on the prevailing market price determined by supply and demand. Accordingly,
the Company does not anticipate any material effect on its future revenues due
to inflation; however, such inflation has generally resulted in upward pressure
on wages and salary to employees.
[Item 8] FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Consolidated Financial Statements for the periods ended
December 31, 1995, and December 31, 1994, the Combined Financial Statements of
the Operating Subsidiaries for the years ended December 31, 1993 and 1992, and
for the six months ended June 30, 1994, and the unaudited pro forma
consolidated financial statements of the Company and its subsidiaries for the
years ended December 31, 1994 and 1993, are included herewith as Appendix A and
incorporated herein by reference.
[Item 9] CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
Information regarding the Company's change of accounting firms has
been previously reported in the Company's Form 8-K/A dated March 16, 1995.
[PART III]
[Item 10] DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
IDENTIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the current directors and executive
officers of the Company as of December 31, 1995, and the ages of and positions
with the Company held by each of such persons:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Yang Jiangang 34 Chairman of the Board of Directors
Li Shunxing 45 Director and President
Wang Faren 48 Vice Chairman of the Board of Directors
Yiu Yat Hung 44 Vice Chairman of the Board of Directors
Han Jian Zhun 47 Director and Vice President
Tam Cheuk Ho 33 Director and Chief Financial Officer
Zhang Yibing 29 Director and Secretary
Wong Wah On 32 Financial Controller
</TABLE>
-24-
<PAGE> 54
Mr. Yang Jiangang has been the Chairman of the Board of Directors of
the Company since December, 1994. He is also a Director of HARC. Mr. Yang
joined the Bank of China Head Office Beijing in 1983 and worked in the Treasury
Division there from 1983 through 1993. He was transferred in January, 1990, to
the Head Office to be the Deputy Manager of the Fixed Income Division, where he
was in charge of fixed income investment of foreign exchange reserves of the
PRC. In June, 1992, Mr. Yang was relocated to the Bank of China London Branch
where he was in charge of treasury operations until April, 1993. He resigned
from the Bank of China in April, 1993, and joined China Everbright Holdings
Company Limited, which is a PRC state-owned enterprise with a number of
overseas subsidiaries, as Deputy General Manager of the Finance Department. In
October, 1993, Mr. Yang became the Deputy General Manager of Everbright Finance
& Investment Co. Limited, a wholly-owned Hong Kong subsidiary of China
Everbright Holdings Company Limited and a shareholder of the Company, and is
presently the Director and Deputy General Manager. Mr. Yang graduated from
Beijing International Relationship Institute with a Bachelor's degree.
Mr. Li Shunxing has been the President of the Company since December,
1994, and a Director since March 15, 1995. He is also a Director of HARC. He
has been the Director and General Manager of Worlder International Company
Limited, a shareholder of the Company, and Director and Deputy General Manager
of Worlder Shipping Limited, both of which are Hong Kong based, wholly-owned
subsidiaries of SINOTRANS GROUP, a PRC state-owned enterprise, since September,
1992. From June, 1990 through August, 1992, Mr. Li was the Director and
Executive Deputy General Manager of Cheemimet Finance Ltd. Hong Kong in charge
of finance, property development and investment matters. For over 15 years, he
has been working with conglomerates in China and their subsidiaries abroad
under the Ministry of Foreign Trade and Economic Corporation and has extensive
experience in corporate management, finance, investment and foreign trade. Mr.
Li graduated from the University of International Business & Economics,
Beijing, in 1976 with a Bachelor's degree.
Mr. Wang Faren has been a Vice Chairman of the Board of Directors of
the Company since December, 1994. He is also the Chairman of the Board of
Directors of HARC. Mr. Wang joined the Farming Bureau in 1968 and worked for
13 years at the Hainan State Farms. Mr. Wang joined the top management of the
Farming Bureau in 1986 as its Deputy Director. He became a Director of the
Farming Bureau in October, 1991, and remains in that position today. Mr. Wang
graduated from South China Tropical Species Research Institute, an agricultural
engineering institute, and received extensive training on agricultural
engineering, botany and tropical plantation. Mr. Wang has more than 25 years
of experience in agricultural production and management.
Mr. Yiu Yat Hung has been a Vice Chairman of the Board of Directors of
the Company since December, 1994. He is also the Vice-Chairman of the Board of
Directors of HARC, and since June, 1988, has been the Chairman of the Board of
Directors and Managing Director of Hong Wah Investment Holdings Limited, a Hong
Kong incorporated private group of companies and a shareholder of the Company.
From January, 1990 through December, 1992, Mr. Yiu was the Chairman of Shenzhen
Hong Wah Industrial and Commerce Company, Ltd., a Sino-foreign limited
liability joint stock company, and was responsible for the formulation of that
entity's investment strategy. Mr. Yiu has more than 12 years of experience in
the financial, commerce and industrial fields in both the PRC and Hong Kong.
Mr. Yiu is currently a member of the Chinese General Chamber of Commerce Hong
Kong and the Federation of Hong Kong Industries. Mr. Yiu is also the Vice
Chairman of the Shenzhen Association of Enterprises with Foreign Investment and
a standing committee member of the China Association of Enterprises with
Foreign Investment.
Mr. Han Jian Zhun has been a Director of the Company since December,
1994, and the Vice President since March 15, 1995. He is also the President
and General Manager of HARC. Mr. Han joined the Farming Bureau in 1968 and has
consistently addressed agriculture production and management issues. Mr. Han
joined the top management of the Farming Bureau in 1986 and became the Deputy
Director in 1991. Mr. Han was also the General Manager of Ba Ye State Rubber
Farms from 1990 through 1991. Mr. Han is heavily involved in industrial
management of the Farming Bureau.
Mr. Tam Cheuk Ho has been a Director and the Chief Financial Officer
of the Company since December, 1994. Prior to joining the Company, from July,
1984 through January, 1992, he worked as Audit Manager at Ernst & Young, Hong
Kong, and from February, 1992 through September, 1992, as Financial Controller
at Tack Hsin Holdings Limited, a listed company in Hong Kong, where he was
responsible for accounting and financial functions. From October, 1992,
through December, 1994, Mr. Tam was Finance Director of Hong Wah (Holdings)
Limited. He is an associate of the Hong Kong Society of Accountants and a
fellow of the Chartered Association of Certified Accountants. He is also a
certified public accountant in Hong Kong. He holds a Bachelor's degree in
Business Administration from the Chinese University of Hong Kong.
Mr. Zhang Yibing has been a Director and the Secretary of the Company
since December, 1994. He is also a Director of HARC. Mr. Zhang joined Bank of
China Beijing Head Office in 1987, working in the Treasury and
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<PAGE> 55
Asset Liability Sector. Mr. Zhang was assigned to Bank of China Sydney Branch
in 1988 where he was in charge of foreign exchange and money market areas of
the treasury. In March, 1991, Mr. Zhang was transferred to the Bank of China
Beijing Head office where he was the Assistant Manager of Fixed Income Division
until December, 1992, when he resigned from the Bank and joined China
Everbright Holdings Co., Ltd. as Finance Manager. Mr. Zhang became the
Corporate Finance Manager of Everbright Finance & Investment Co. Limited, a
wholly-owned subsidiary of China Everbright Holdings Co. Ltd. and a shareholder
of the Company, in October, 1993, and, in March, 1994, was appointed the Senior
Manager of Everbright Finance & Investment Co. Ltd., where he was in charge of
investment and lending. Mr. Zhang graduated from Beijing Foreign Languages
Institute with a Bachelor's Degree.
Mr. Wong Wah On is the Financial Controller of the Company and a
member of the supervisory committee of HARC. He is responsible for assisting
the Chief Finance Officer of the Company's treasury, accounting and secretarial
functions. From October, 1992, through December, 1994, Mr. Wong was the Deputy
Finance Director of Hong Wah (Holdings) Limited. From July, 1988, through
October, 1992, he was the audit supervisor at Ernst & Young, Hong Kong. He
received a professional diploma in Company Secretaryship and Administration
from the Hong Kong Polytechnic institute and is an associate of the Chartered
Association of Certified Accountants, the Hong Kong Society of Accountants, and
the Institute of Chartered Secretaries and Administrators. He is also a
certified public accountant in Hong Kong.
Each director is elected to hold office until the next annual meeting
of shareholders and until his successor is chosen and qualified.
The officers of the Company are elected annually at the first Board of
Directors meeting following the annual meeting of shareholders, and hold office
until their respective successors are duly elected and qualified, unless sooner
displaced.
IDENTIFICATION OF SIGNIFICANT EMPLOYEES
The following table sets forth certain significant employees of the
Company as of December 31, 1995 and the ages of and positions with the Company
held by each of such persons:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Li Fei Lie 29 Project Manager
</TABLE>
Mr. Li Fei Lie is the Project Manager of the Company. He is also vice
president and a director of HARC, where he is responsible for accounting and
financial control. In 1987, he obtained a Bachelor's degree in Economics from
the Beijing University. In 1990, he obtained a Master's degree in Economics
from the same university. From 1990 through April 1991, he was the Vice
Chairman of the Beijing Agency of Guangxi Wuzhou Boiler Factory. From April,
1991 through October, 1992, he was the General Manager of the Development
Department of Shenzhen Hong Wah Industrial and Commerce Company Ltd., a
Sino-foreign limited liability joint stock company. In October, 1992, Mr. Li
became Assistant to the General Manager of Hong Wah (Holdings) Limited and was
responsible for the preparatory work relative to the incorporation of HARC.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Based upon the Company's review of Forms 5 furnished to the Company
with respect to its fiscal year ended December 31, 1995, each of the following
directors, officers and beneficial owners of more than ten percent of the
Company's Common Stock filed a Form 5 reporting previously unreported
transactions which were reportable, or previously unreported holdings which
became reportable, during such fiscal year: Yang Jiangang, Li Shunxing, Wang
Faren, Zhang Yibing, Everbright Finance & Investment Company Limited, Hong Wah
Investment Holdings Limited, Silverich Limited, and Worlder International
Company Limited reported holdings which became reportable on June 26, 1995, as
a result of the effectiveness of the Company's Form 8-A registration statement.
Yiu Yat Hung, Han Jian Zhun, Tam Cheuk Ho, Li Fei Lie and Wong Wah On reported
holdings which became reportable on June 26, 1995, as a result of the
effectiveness of the Company's Form 8-A registration statement, as well as
reportable transactions which occurred on July 1, 1995. All of the Forms 5
were filed on a timely basis except for those filed by Wang Faren, Han Jian
Zhun and Li Fei Lie.
[Item 11] EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
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<PAGE> 56
<TABLE>
<CAPTION>
Annual Compensation Long Term
Compensation
-------------------------------------------------------
Other
Annual Securities
Compensation Underlying All Other
Salary Bonus Options Compensation
Name and Principal Position Year (US$) (US$) (US$) (#) (1) (US$)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Li Shunxing, President 1995 -0- -0- -0- -0-
-0-
1994 -0- -0- -0- -0- -0-
1993 N/A N/A N/A N/A N/A
Han Jian Zhun, Vice
President, President of 1995 647 -0- -0- 6,000 -0-
HARC
1994 -0- -0- -0- -0- -0-
1993 N/A N/A N/A N/A N/A
Li Fei Lie, Project Manager
Vice President of HARC 1995 56,436 -0- -0- 100,000 -0-
1994 28,994 -0- -0- -0- -0-
1993 N/A N/A N/A N/A N/A
=======================================================================================================================
</TABLE>
-27-
<PAGE> 57
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Potential Realizable Value at
Assumed Annual Rates of Stock
Individual Grants Price Appreciation for Option Term
----------------------------------------------------------------------------------------------------------
% of Total
Number of Options
Securities Granted to
Underlying Employees Exercise
Options in Fiscal Price (2) Expiration
Name Granted(#)(1) Year (1) (US$/Sh) Date 0% 5% 10%
---- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Li Shunxing -0- N/A N/A N/A N/A N/A N/A
Han Jian Zhun 6,000 0.25% 3.78 07/01/05 -0- 14,263 36,146
Li Fei Lie 100,000 4.17% 3.78 07/01/05 -0- 237,722 602,435
=========================================================================================================================
</TABLE>
(1) The Company has granted no Stock Appreciation Rights ("SARs"). For
information regarding stock options issued pursuant to the Company's Stock
Option Plan, see "Stock Options," hereinbelow.
(2) As of December 31, 1996, none of the stock options held by Mr. Han or Mr.
Li were exercisable. All of such options were "in-the-money" at such date, as
the fair market value (as defined int the Company's Stock Option Plan) of the
Common Stock on December 29, 1995, was US$6.375 per share. Consequently, the
value of Mr. Han's unexercised options on that date was US$15,570, and the
value of Mr. Li's unexercised options on that date was US$259,500.
The Company paid its Chief Executive Officer, Li Shunxing, no annual
salary or bonus in 1993, 1994 1995. During the fiscal years ended December 31,
1993, 1994, and 1995, no director or executive officer of the Company or any of
its subsidiaries was paid a total annual salary and bonus in excess of
US$100,000. Han Jian Zhun, the vice president and a director of the Company
and the president of HARC, was paid an annual salary and bonus of US$0 for the
year ended December 31, 1994, and HK$5,000 (US$647) for the year ended December
31, 1995. As of August 1, 1995, Billion Luck entered into an Employment
Agreement with Mr. Han. In accordance with the terms of the Employment
Agreement, Mr. Han has been employed by Billion Luck to perform such duties
with respect to Billion Luck as Billion Luck's Board of Directors shall from
time to time determine. Mr. Han shall receive a base salary of HK$12,000
(US$1,552) annually, which base salary shall be adjusted on each anniversary of
the Employment Agreement to reflect a change in the applicable consumer price
index or such greater amount as Billion Luck's Board of Directors may
determine. The Employment Agreement has a term of three (3) years unless
earlier terminated as provided therein. See "Certain Relationships and Related
Transactions."
Li Fie Lie, the Project Manager of the Company and the vice president
and a director of HARC, was paid an annual salary of US$28,994 for the year
ended December 31, 1994, and HK$436,250 (US$56,436) for the year ended December
31, 1995. Also, as of August 1, 1995, Billion Luck entered into an Employment
Agreement with Li Fei Lie. In accordance with the terms of the Employment
Agreement, Mr. Li has been employed by Billion Luck to perform such duties with
respect to Billion Luck as Billion Luck's Board of Directors shall from time to
time determine. Mr. Li shall receive a base salary of HK$240,000 (US$31,048)
annually, which base salary shall be adjusted on each anniversary of the
Employment Agreement to reflect a change in the applicable consumer price index
or such greater amount as Billion Luck's Board of Directors may determine. The
Employment Agreement has a term of three (3) years unless earlier terminated as
provided therein. See "Certain Relationships and Related Transactions."
In addition, on February 1, 1994, Billion Luck entered into a
consulting agreement with Brender Services Limited, a British Virgin Islands
company beneficially owned by Mr. Wong Wah On, the Financial Controller of the
Company. In accordance with this consulting agreement, during the year ended
December 31, 1994, a consulting fee of HK$880,000 (US$113,842), was paid to
Brender Services Limited. On April 30, 1995, the Company entered into another
consulting agreement pursuant to which Brender Services Limited agreed to
provide consulting services to the Company for a period of five years
commencing on May 1, 1995. In consideration of the services to be rendered by
Brender Services Limited, the Company agreed to pay a consultancy fee of
HK$170,000 (US$21,992) per month during the first two years of the term of the
consulting agreement and a fee to be agreed upon by the parties, but not less
than HK$170,000 (US$21,992) per month, for the remaining three years of the
term. The Company also agreed to reimburse Brender Services Limited for all
out-of-pocket costs incurred in connection with rendering services under
-28-
<PAGE> 58
the agreement. During the year ended December 31, 1995, a consulting fee of
HK$1,680,000 (US$217,335), was paid to Brender Services Limited. See "Certain
Relationships and Related Transactions."
Except for the foregoing, the Company has no employment contracts with
any of its officers or directors and maintains no retirement, fringe benefit or
similar plans for the benefit of its officers or directors. The Company may,
however, enter into employment contracts with its officers and key employees,
adopt various benefit plans and begin paying compensation to its officers and
directors as it deems appropriate to attract and retain the services of such
persons.
The Company does not pay fees to directors for their attendance at
meetings of the Board of Directors or of committees; however, the Company may
adopt a policy of making such payments in the future. The Company will
reimburse out-of-pocket expenses incurred by directors in attending Board and
committee meetings.
During the fiscal year ended December 31, 1995, no holder of stock
options exercised such options, and all stock options granted remained
outstanding. Also during such fiscal year, no long-term incentive plans or
pension plans were in effect with respect to any of the Company's officers,
directors or employees.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company's Board of Directors did not have a compensation committee
or a committee performing similar functions during the year ended December 31,
1996, and on other relationship existed during such year for which disclosure
is required pursuant to Item 401(j) of Regulation S-K.
[Item 12] SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
BENEFICIAL OWNERS OF MORE THAN 5%
OF THE COMPANY'S COMMON STOCK
The following table sets forth, to the knowledge of management, each
person or entity who is the beneficial owner of more than 5% of the outstanding
shares of the Company's Common Stock or Series A Preferred Stock outstanding as
of March 29, 1996, the number of shares owned by each such person and the
percentage of the outstanding shares represented thereby.
<TABLE>
<CAPTION>
Amount and
Name and Address Nature of Percent of
of Beneficial Owner Beneficial Ownership (1) Class (2)
------------------- ------------------------ ---------
<S> <C> <C>
Hong Wah Investment Holdings Limited 3,672,000 Common Stock 29.73%
Room 3105, 31/F.
Universal Trade Center 2,432,000 Series A Preferred 38.00%
3-5A Arbuthnot Road
Central, Hong Kong
Everbright Finance & Investment 1,998,000 Common Stock 16.17%
Co. Limited(2)
23/F., Office Tower 1,184,000 Series A Preferred 18.50%
Convention Plaza
1 Harbour Road
Wanchai, Hong Kong
Worlder International Company 1,998,000 Common Stock 16.17%
Limited(2)
21/F., Great Eagle Centre 1,184,000 Series A Preferred 18.50%
No. 23 Harbour Road
Hong Kong
</TABLE>
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<PAGE> 59
<TABLE>
<S> <C> <C>
Silverich Limited(2) 2,700,000 Common Stock 21.86%
Room 2005, 20/F.
Universal Trade Center 1,600,000 Series A Preferred 25.00%
3-5A Arbuthnot Road
Central, Hong Kong
</TABLE>
(1) The inclusion herein of any shares deemed beneficially owned does not
constitute an admission of beneficial ownership of these shares.
(2) Silverich Limited is owned by Everbright Finance & Investment Co. Limited
(50%) and by Worlder International Company Limited (50%).
SHARE OWNERSHIP OF OFFICERS AND DIRECTORS
The following table sets forth certain information with respect to the
beneficial ownership of Common Stock as of March 29, 1996, by (i) each director
of the Company, (ii) each executive officer of the Company named in the summary
compensation table, and (iii) all directors and executive officers of the
Company as a group. All information with respect to beneficial ownership has
been furnished by the respective director or executive officer (in the case of
shares beneficially owned by each of them). Unless otherwise indicated in a
footnote, each stockholder possesses sole voting and investment power with
respect to the shares indicated as beneficially owned.
<TABLE>
<CAPTION>
Amount and
Name of Nature of Percent of
Beneficial Owner Beneficial Ownership (1) Class
---------------- ------------------------ -----
<S> <C> <C> <C>
Yang Jiangang -0- N/A
Li Shunxing -0- N/A
Wang Faren -0- N/A
Yiu Yat Hung 3,672,000 Common Stock 29.73%
2,432,000 Series A Preferred(2) 38.00%
Han Jian Zhun -0-(3) N/A
Tam Cheuk Ho -0-(4) N/A
Zhang Yibing -0- N/A
Li Fei Lie -0-(5) N/A
Wong Wah On 432,000 Common Stock(6) 3.50%
All executive officers 4,104,000 Common Stock 33.23%
and directors as a group 2,432,000 Series A Preferred 38.00%
</TABLE>
(1) The inclusion herein of any shares deemed beneficially owned does not
constitute an admission of beneficial ownership of these shares.
(2) Hong Wah Investment Holdings Limited owns 3,672,000 shares of Common
Stock. Hong Wah Investment Holdings Limited is a Hong Kong company of which
Yiu Yat Hung, the Vice Chairman of the Board of Directors of the Company, is a
director. Additionally, Hong Wah Investment Holdings Limited is beneficially
owned by Yiu Yat On, a brother of Yiu Yat Hung. In addition, Mr. Yiu was
granted options to purchase 6,000 shares of Common Stock under the Company's
Stock Option Plan as described under "Stock Options," below.
(3) Han Jian Zhun was granted options to purchase 6,000 shares of Common Stock
under the Company's Stock Option Plan as described under "Stock Options,"
below.
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<PAGE> 60
(4) Tam Cheuk Ho was granted options to purchase 6,000 shares of Common Stock
under the Company's Stock Option Plan as described under "Stock Options,"
below.
(5) Li Fei Lie was granted options to purchase 100,000 shares of Common Stock
under the Company's Stock Option Plan as described under "Stock Options,"
below.
(6) Brender Services Limited owns 432,000 shares of Common Stock. Brender
Services Limited is beneficially owned by Wong Wah On, the Financial Controller
of the Company. In addition, Brender was granted options to purchase 100,000
shares of Common Stock under the Company's Stock Option Plan, and Mr. Wong was
granted options to purchase 6,000 shares of Common Stock under the Plan, as
described under "Stock Options," below.
STOCK OPTIONS
The Company adopted a Stock Option Plan (the "Plan") as of March 31,
1995. The Plan allows the Board of Directors, or a committee thereof at the
Board's discretion, to grant stock options to officers, directors, key
employees, consultants and affiliates of the Company. Initially, 2,400,000
shares of common stock may be issued and sold pursuant to options granted under
the Plan. "Incentive Stock Options" within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"), may be granted to
employees, including officers, whether or not they are members of the Board of
Directors, and nonqualified stock options may be granted to any such employee
or officer and to directors, consultants, and affiliates who perform
substantial services for or on behalf of the Company or its subsidiaries.
The Board of Directors, or a committee appointed by the Board (the
"Committee"), is vested with authority to (i) select persons to participate in
the Plan; (ii) determine the form and substance of grants made under the Plan
to each participant, and the conditions and restrictions, if any, subject to
which grants will be made; (iii) interpret the Plan; and (iv) adopt, amend, or
rescind such rules and regulations for carrying out the Plan as it may deem
appropriate. The Board of Directors has the power to modify or terminate the
Plan and from time to time may suspend, and if suspended may reinstate, any or
all of the provisions of the Plan except that (i) no modification, suspension,
or termination of the Plan may, without the consent of the grantee affected,
alter or impair any grant previously made under the Plan; and (ii) no
modification shall become effective without prior consent of the shareholders
of the Company that would (a) increase the maximum number of shares reserved
for issuance under the Plan, except for certain adjustments allowed by the
Plan; (b) change the classes of employees eligible to participate in the Plan;
or (c) materially increase the benefits accruing to participants in the Plan.
The Plan provides that the price per share deliverable upon the
exercise of each Incentive Stock Option shall not be less than 100% of the fair
market value of the shares on the date the option is granted, as the Committee
determines. In the case of the grant of any Incentive Stock Option to an
employee who, at the time of the grant, owns more than 10% of the total
combined voting power of all classes of stock of the Company or any of its
subsidiaries, such price per share, if required by the Code at the time of
grant, shall not be less than 110% of the fair market value of the shares on
the date the option is granted. The price per share deliverable upon the
exercise of each nonqualified stock option shall not be less than the higher of
(i) the net tangible assets per share of the Company as of the end of the
fiscal year immediately preceding the date of such granting; or (ii) 80% of the
fair market value of the shares on the date the option is granted, as the
Committee determines.
Options may be exercised in whole or in part upon payment of the
exercise price of the shares to be acquired. Payment shall be made in cash or,
in the discretion of the Committee, in shares previously acquired by the
participant or in a combination of cash and shares of Common Stock. The fair
market value of shares of Common Stock tendered on exercise of options shall be
determined on the date of exercise.
As of July 1, 1995, pursuant to the recommendation of a committee of
disinterested persons appointed by the board of directors in accordance with
the terms of the Plan, the board of directors granted options to the following
officers and directors to purchase shares of the Company's Common Stock:
Yiu Yat Hung 6,000 shares
Tam Cheuk Ho 6,000 shares
Han Jian Zhun 6,000 shares
Wong Wah On 6,000 shares
Li Fei Lie 100,000 shares
In addition, the board of directors granted options to the following employees
and consultant to purchase shares of the Company's Common Stock:
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<PAGE> 61
Brender Services Limited 100,000 shares
Cheung Yu Shum 500,000 shares
Tse Chi Kai 300,000 shares
Ma Sin Ling 500,000 shares
Cheung Siu Yin 10,000 shares
Woo Pui Yan 10,000 shares
Kwok Kwan Hung 386,000 shares
Fu Yang Guang 200,000 shares
Lin Jia Ping 270,000 shares
All of the stock options were issued in accordance with the terms of the Plan
at an exercise price of US$3.78 (the fair market value of the Common Stock as
of July 1, 1995) and are exercisable beginning on July 1, 1996, and until July
1, 2005. Stock options have now been granted with respect to all 2,400,000
shares of Common Stock subject to the Plan, and all stock options remain
outstanding.
[Item 13] CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following transactions with the management of the Company and
others were noted:
On January 31, 1994, the Farming Bureau, Guilinyang Farm, and Billion
Luck entered into a Contract On Investment For The Setting Up Of Hainan
Agricultural Resources Company Ltd. pursuant to which such parties agreed to
establish HARC as a limited liability joint stock company under the Rules for
Standardized Incorporated Companies in the PRC and the regulations of Hainan
Province. The agreement provided that HARC's total initial capitalization of
Rmb100 million in assets and cash was to be contributed as follows: the
Farming Bureau (39%), Guilinyang Farm (5%) and Billion Luck (56%).
On February 1, 1994, Billion Luck entered into a consulting agreement
with Brender Services Limited, a British Virgin Islands company, beneficially
owned by Mr. Wong Wah On, the Financial Controller of the Company, pursuant to
which Billion Luck agreed to pay a monthly consulting fee of HK$80,000
(US$10,349) to Brender Services Limited for a ten month period up to a maximum
of HK$800,000 (US$103,493). On November 1, 1994, a supplementary agreement was
entered to extend the consulting agreement for up to five additional months
until the earlier of April 30, 1995, or the completion of the capital raising
efforts of the Company. During the year ended December 31, 1994, a consulting
fee of HK$880,000 (US$113,695) was paid to Brender Services Limited. As
discussed below, the Company and Brender Services Limited entered into a new
consulting agreement on April 30, 1995.
On May 10, 1994, Hong Wah Investment Holdings Limited, a Hong Kong
company, Everbright Finance & Investment Co. Limited, a Hong Kong company,
Worlder International Company Limited, a Hong Kong company, Silverich Limited,
a British Virgin Islands company, and Brender Services Limited, a British
Virgin Islands company, who are the sole shareholders of Billion Luck
(collectively, the "Lenders"), and Billion Luck entered into a Loan Agreement
pursuant to which the Lenders, on a pro rata basis in proportion to the
relative percentage interest in Billion Luck, agreed to extend certain loans to
Billion Luck in an aggregate principal amount of US$6,426,806. The proceeds
under such loan financed Billion Luck's equity investment in HARC. The loan
was originally unsecured, bore no interest and was scheduled to be due and
payable in full on May 10, 1999. However, the repayment date could be further
extended as agreed in writing by the Lenders. In accordance with the Loan
Agreement, Billion Luck could prepay the loans granted provided that a written
notice signed by one of Billion Luck's directors is given to the Lenders not
less than three days prior to the respective prepayment.
On June 1, 1994, Everbright Finance & Investment Co. Limited, Worlder
International Company Limited, Hong Wah Investment Holdings Limited and Billion
Luck Company Ltd. entered into a Credit Agreement pursuant to which Everbright
Finance & Investment Co. Limited, Worlder International Company Limited and
Hong Wah Investment Holdings Limited agreed to extend loans to Billion Luck
Company Ltd. in an aggregate principal amount of HK$6,000,000. All loans under
this Credit Agreement shall bear interest equal to the Hong Kong dollar prime
lending rate quoted by the Hong Kong and Shanghai Banking Corporation Limited
from time to time and mature and become due and payable in full on June 30,
1995, subject to further extension of the repayment date as agreed in writing
by the lenders. On August 8, 1994, the parties to the Credit Agreement entered
into a supplemental letter agreement whereby the available principal amount of
the credit facility was increased from HK$6,000,000 to HK$8,000,000. By a
letter agreement dated June 1, 1995, the lenders collectively agreed to further
extend the repayment date to December 31, 1995. The loans were subsequently
fully repaid on March 12, 1996.
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<PAGE> 62
On July 7, 1994, HARC entered into a Contract of Investment in the
Xilian Timber Mill with the Xilian State Rubber Farm, a subsidiary farm owned
and controlled by the Farming Bureau, pursuant to which HARC subscribed for a
12.64% equity interest in the Xilian Farm Timber Mill ("Xilian Mill"), a timber
factory in Hainan, PRC, for consideration of Rmb5.21 million (US$626,202).
According to the agreement, HARC will be entitled to a fixed 20% return on its
investment in Xilian Mill for a three-year period from the date of
subscription. Thereafter, HARC will be entitled to Xilian Mill's profit in
proportion to its percentage ownership of shares therein, subject to a minimum
return of 20% on its investment. On December 24, 1994, the parties entered
into a supplementary agreement reducing the amount of HARC's investment to Rmb5
million (US$600,962) but keeping unchanged HARC's percentage ownership of
Xilian Mill at 12.64%.
On July 11, 1994, HARC entered into an agreement with Guilinyang Farm
pursuant to which Guilinyang Farm agreed to sell and HARC agreed to buy a 6.6%
equity interest in Zhong Ya Aluminum Factory (the "Aluminum Factory"), an
aluminum processing plant in Hainan, for consideration totalling Rmb5 million
(US$603,000). In accordance with the terms of the agreement, HARC will be
entitled to a minimum annual return of Rmb1 million in the Aluminum Factory for
a two-year period from the date of acquisition. Thereafter, HARC will be
entitled to pro rata distributions of the profit obtained from the operation of
the Aluminum Factory in proportion to its percentage interest therein.
On July 15, 1994, the Farming Bureau and HARC entered into a Rental
Agreement for the rental of 532 square meters of a building located in Haikou
City, PRC, in which HARC's corporate headquarters are located. Such rental
agreement is for a period of 10 years at an annual rental of Rmb170,240
(US$20,462) payable in equal semi-annual installments. The rental agreement
further provides that HARC shall be responsible for certain costs and expenses
in connection with its use of the property.
On October 24, 1994, Everbright Finance & Investment Co. Limited and
Worlder International Company Limited entered into a letter agreement with
Billion Luck whereby Everbright Finance & Investment Co. Limited and Worlder
International Limited agreed to grant a loan facility to Billion Luck for a
total of HK$6,000,000 (US$776,197). All outstanding loans under this loan
facility shall bear interest at the prime rate announced by the Hong Kong and
Shanghai Banking Corporation Limited from time to time plus 3% and are
repayable on demand. These loans were subsequently repaid on March 12, 1996.
On November 5, 1994, the Farming Bureau, HARC, First Supply and Second
Supply entered into a Sale and Purchase Agreement, in connection with the
Operating Subsidiaries' natural rubber purchases, materials sourcing and
procurement activities. With respect to the natural rubber segment, the
Farming Bureau agreed to direct the Hainan State Farms to sell to HARC and the
Operating Subsidiaries on a priority basis, and HARC and the Operating
Subsidiaries have agreed to purchase from the Hainan State Farms under the same
terms and conditions as are offered to other purchasers. If HARC or the
Operating Subsidiaries are offered the same quantity and same price for natural
rubber from a Hainan State Farm and a non-state farm, HARC or the Operating
Subsidiaries, as the case may be, must purchase from the Hainan State Farm. If
the price offered by the Hainan State Farm is higher than that from a non-state
farm, HARC or the Operating Subsidiaries, as the case may be, may purchase from
the non-state farm. Otherwise, there is no condition requiring the purchase of
any particular quantity of raw natural rubber from the Hainan State Farms.
With respect to the production materials segment, the Sale and
Purchase Agreement provides that the Farming Bureau will direct the Hainan
State Farms to purchase all of their production materials and other commodities
offered by HARC and the Operating Subsidiaries under the same terms and
conditions as are offered by other suppliers. In the case of production
material and other commodities, a Hainan State Farm requests a price quote for
a specified quantity of a particular item from HARC or the Operating
Subsidiaries, and HARC or an Operating Subsidiary provides a quote. Upon
receiving the price quote, the Hainan State Farm can obtain quotes from other
suppliers based on the same quantity of the requested item. The Hainan State
Farm must inform HARC or the Operating Subsidiaries, as the case may be, of the
amounts of the other quotes and, if any of the quotes are lower, HARC or the
Operating Subsidiaries have the right to lower its quote to the level of the
competing quote. If HARC or an Operating Subsidiary matches the competing
quote based upon the same quantity of item requested, the Hainan State Farm
must purchase the item from HARC or the applicable Operating Subsidiary.
Otherwise, the Hainan State Farm can purchase the item from the competing
supplier. The Sale and Purchase Agreement has a term of 15 years and, subject
to applicable law, may not be terminated earlier except upon the agreement of
the parties. The Sale and Purchase Agreement will expire on November 5, 2009.
On March 30, 1995, parties entered into a Supplementary Agreement which
clarified certain terms of the Sale and Purchase Agreement among the parties
dated November 5, 1994, including the definitions of "annual gross profit
margin" and "rubber sales revenue." The Supplementary Agreement is effective as
long as the Sale and Purchase Agreement remains effective.
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<PAGE> 63
On November 5, 1994, the Farming Bureau and HARC entered into an
Agreement on Service and Cooperation, pursuant to which the Farming Bureau has
agreed to grant to HARC certain land use and development rights related to the
land on which the warehouses, factories, and other industrial and office
facilities of HARC and the Operating Facilities are located and to provide
certain related services to HARC. In consideration of the foregoing, HARC
shall pay to the Farming Bureau an annual service fee equivalent to 10% of the
consolidated after-tax profit of HARC up to a maximum of Rmb5 million
(US$600,962), provided that HARC's consolidated after-tax profit, as computed
in accordance to U.S. GAAP and audited by internationally recognized
accountants, shall not be less than Rmb40 million (US$4,807,692).
On March 15, 1995, First Supply entered into an Agreement on
Administrative Expenses Apportionment with Jin Long Corporation ("Jin Long"), a
PRC company which is owned by the Farming Bureau, pursuant to which First
Supply agreed to provide certain capital resources, office equipment, warehouse
usage and personnel resources to Jin Long in exchange for a payment from Jin
Long to First Supply of Rmb3 million in 1995. The agreement was effective for
the year 1995, and Jin Long made the required payment during 1995.
On March 15, 1995, Second Supply entered into an Agreement on
Administrative Expenses Apportionment with Jin Huan Corporation ("Jin Huan"), a
PRC company which is owned by the Farming Bureau, pursuant to which Second
Supply agreed to provide certain capital resources, office equipment, warehouse
usage and personnel resources to Jin Huan in exchange for a payment from Jin
Huan to Second Supply of Rmb3 million in 1995. The agreement was effective for
the year 1995, and Jin Huan made the required payment during 1995.
On March 30, 1995, HARC, the Operating Subsidiaries and the Farming
Bureau entered into an Agreement on Rubber Purchase Deposits, pursuant to which
the Farming Bureau guarantees the supply of a minimum of 120,000 tons (the
"Guaranteed Quantity") of natural rubber for each of the next three years. The
Operating Subsidiaires are not obligated to purchase the Guaranteed Quantity.
In consideration of this guarantee, the Operating Subsidiaries have maintained
a purchase deposit on a rolling basis equivalent to 15% of the Guaranteed
Quantity multiplied by the average market price of natural rubber for the
previous quarter. In return, a purchase discount is offered to the Operating
Subsidiaries for the purchase of natural rubber from the Hainan State Farms.
The Agreement has a term of 15 years.
As of March 31, 1995, the Company entered into an Exchange Agreement
with several of its shareholders whereby the Company's outstanding indebtedness
to those shareholders, in the amount of approximately US$6,400,000, was
exchanged for 6,400,000 shares of Series A Preferred Stock, which was
authorized and issued by the Company as of that date. The shares of Series A
Preferred Stock were issued pursuant to the Exchange Agreement to the
shareholders as follows: Hong Wah Investment Holdings Limited (2,432,000
shares), Everbright Finance & Investment Co. Ltd. (1,184,000 shares), Worlder
International Company Limited (1,184,000 shares), and Silverich Limited
(1,600,000 shares).
As of March 31, 1995, the Company adopted a Stock Option Plan (the
"Plan") pursuant to which the Company's Board of Directors, or a committee
thereof at the Board's discretion, is authorized to grant stock options to
officers, directors, key employees, consultants and affiliates of the Company.
Initially, 2,400,000 shares of Common Stock were authorized for issuance under
the Plan. As of July 1, 1995, the Board granted options for all 2,400,000
shares of Common Stock authorized under the Plan to various officers, directors
and employees of the Company and to a consultant of the Company. All of such
options remain outstanding, and none is exercisable until July 1, 1996. See
"Security Ownership of Certain Beneficial Owners and Management."
As of April 30, 1995, the Company entered into a consulting agreement
with Brender Services Limited pursuant to which Brender Services Limited agreed
to provide accounting and consulting services to the Company for a period of
five years commencing on May 1, 1995. In consideration of the services to be
rendered by Brender Services Limited, the Company agreed to pay a consultancy
fee of HK$170,000 (US$21,992) per month during the first two years of the term
of the consulting agreement and a fee to be agreed upon by the parties, but not
less than HK$170,000 (US$21,992) per month, for the remaining three years of
the term. The Company also agreed to reimburse Brender Services Limited for
all out-of-pocket costs incurred in connection with rendering services under
the agreement. During the year ended December 31, 1995, a consulting fee of
HK$1,680,000 (US$217,335) was paid to Brender Services Limited.
As of August 1, 1995, Billion Luck entered into an Employment
Agreement with Han Jian Zhun. Mr. Han Jian Zhun is presently the vice
president and a director of the Company and the president of HARC, but, in
accordance with the terms of the Employment Agreement, Mr. Han Jian Zhun has
been employed by Billion Luck to perform such duties with respect to Billion
Luck as Billion Luck's Board of Directors shall from time to time determine.
Mr. Han Jian Zhun shall receive a base salary of HK$12,000 (US$1,552) annually,
which base salary shall be adjusted on each anniversary of the Employment
Agreement to reflect a change in the applicable consumer
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<PAGE> 64
price index or such greater amount as Billion Luck's Board of Directors may
determine. The Employment Agreement has a term of three (3) years unless
earlier terminated as provided therein.
As of August 1, 1995, Billion Luck entered into an Employment
Agreement with Li Fei Lie. Mr Li is presently the Project Manager of the
Company and the vice president and a director of HARC, but, in accordance with
the terms of the Employment Agreement, Mr. Li has been employed by Billion Luck
to perform such duties with respect to Billion Luck as Billion Luck's Board of
Directors shall from time to time determine. Mr. Li shall receive a base
salary of HK$240,00 (US$31,048) annually, which base salary shall be adjusted
on each anniversary of the Employment Agreement to reflect a change in the
applicable consumer price index or such greater amount as Billion Luck's Board
of Directors may determine. The Employment Agreement has a term of three (3)
years unless earlier terminated as provided therein.
During the fiscal year ended December 31, 1995, the Operating
Subsidiaries engaged in the trading of natural rubber futures contracts through
a broker owned by Jin Huan Corporation ("Jin Huan"), a PRC company which is
owned by the Farming Bureau. These transactions resulted in payments of
handling fees by the Operating Subsidiaries to the broker during 1995 which
amounted to Rmb4.4 million.
In addition to these transactions, the following business
relationships existed during the fiscal year ended December 31, 1995, for which
disclosure is required: As disclosed in "Management and Certain Security
Holders," hereinabove, Han Jian Zhun, the Vice President and a director of the
Company, also serves as the Deputy Director of the Farming Bureau; and Wang
Faren, the Vice Chairman of the Board of Directors of the Company, also serves
as the Director of the Farming Bureau. The nature and scope of the
relationship between the Company and the Farming Bureau is set forth in
"Business" and elsewhere hereinabove.
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<PAGE> 65
[PART IV]
[Item 14] EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K
The following financial statements are filed as a part of this Form
10-K in Appendix A hereto:
1. Manually signed, independent auditor's report, together with
consolidated financial statements for the Company and
subsidiaries, including:
a. Consolidated statements of income for the
period from December 14, 1993, to December
31, 1994, and for the year ended December 31,
1995
b. Consolidated statements of changes in
shareholders' equity for the period from
December 14, 1993, to December 31, 1994, and
for the year ended December 31, 1995
c. Consolidated balance sheets as of December
31, 1994 and 1995
d. Consolidated statements of cash flows for the
period from December 14, 1993, to December
31, 1994, and for the year ended December 31,
1995
e. Notes to consolidated financial statements.
2. Copy of independent auditor's report, together with combined
financial statements of First Supply and Second Supply
(original manually signed report and financial statements were
filed as Appendix A of the Company's Form 10-K/A for the
fiscal year ended December 31, 1994, are included herewith as
an exhibit and are incorporated herein by reference)
including:
a. Combined statements of income and equity for
the years ended December 31, 1992 and 1993,
and for the six months ended June 30, 1994
b. Combined balance sheet as at December 31, 1993
c. Combined statements of cash flows for the
years ended December 31, 1992 and 1993, and
for the six months ended June 30, 1994
d. Notes to combined financial statements.
3. Unaudited pro forma consolidated financial information of the
Company and subsidiaries, including:
a. Unaudited pro forma consolidated statement of
income for the year ended December 31, 1994
b. Unaudited pro forma consolidated statement of
income for the year ended December 31, 1993
c. Notes to unaudited pro forma consolidated
financial information.
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<PAGE> 66
The following Exhibits are filed as part of this Form 10-K:
Exhibit No. Exhibit Description
3 .1 Articles of Incorporation of the Registrant, filed on January
15, 1986 (Filed with Annual Report on Form 10-K/A for the
fiscal year ended December 31, 1994, and incorporated herein
by reference.)
3 .2 By-laws of the Registrant (Filed with Annual Report on Form
10-K/A for the fiscal year ended December 31, 1994, and
incorporated herein by reference.)
3 .3 Certificate of Amendment of Articles of Incorporation of the
Registrant, filed on November 18, 1994 (Filed with Annual
Report on Form 10-K/A for the fiscal year ended December 31,
1994, and incorporated herein by reference.)
3 .4 Certificate of Amendment of Articles of Incorporation of the
Registrant, filed on November 18, 1994 (Filed with Annual
Report on Form 10-K/A for the fiscal year ended December 31,
1994, and incorporated herein by reference.)
3 .5 Certificate of Amendment of Articles of Incorporation of the
Registrant, effective March 31, 1995, and filed on June 19,
1995 (Filed with Quarterly Report on Form 10-Q/A for the
fiscal quarter ended March 31, 1995, and with Current Report
on Form 8-K dated June 19, 1995, and incorporated herein by
reference.)
4 .1 Certificate of Designation of Series B Convertible Preferred
Stock, filed on December 13, 1995 (Filed with Current Report
on Form 8-K dated March 8, 1996, and incorporated herein by
reference.)
10.1 Assignment Agreement dated January 21, 1994, by and between
Hong Wah (Holdings) Limited and Billion Luck Company Ltd.
(Filed with Annual Report on Form 10-K/A for the fiscal year
ended December 31, 1994, and incorporated herein by
reference.)
10.2 Contract on Investment for the Setting up of Hainan
Agricultural Resources Company Ltd. dated January 31, 1994, by
and among Hainan Province Agricultural Reclamation General
Company (the Farming Bureau), Hainan Province Guilinyang State
Farm, and Billion Luck Company Ltd. (Original Chinese version
with English translation filed with Annual Report on Form
10-K/A for the fiscal year ended December 31, 1994, and
incorporated herein by reference.)
10.3 Loan Agreement dated May 10, 1994, by and among Everbright
Finance & Investment Co. Limited, Worlder International
Company Limited, Hong Wah Investment Holdings Limited,
Silverich Limited, Brender Services Limited, and Billion Luck
Company Ltd. (Filed with Annual Report on Form 10-K/A for the
fiscal year ended December 31, 1994, and incorporated herein
by reference.)
10.4 Credit Agreement dated June 1, 1994, by and among Everbright
Finance & Investment Co. Limited, Worlder International
Company Limited, Hong Wah Investment Holdings Limited and
Billion Luck Company Ltd. (Filed with Annual Report on Form
10-K/A for the fiscal year ended December 31, 1994, and
incorporated herein by reference.)
10.5 Contract on the Transfer of Share Ownership of Hainan Zhongya
Aluminum Co., Ltd. dated July 11, 1994, by and between Hainan
Province Guilinyang State Farm and Hainan Agricultural
Resources Co., Ltd. (Filed with Annual Report on Form 10-K/A
for the fiscal year ended December 31, 1994, and incorporated
herein by reference.)
10.6 Letter Agreement dated August 8, 1994, by and among Everbright
Finance & Investment Co. Limited, Worlder International
Company Limited, Hong Wah Investment Holdings Limited and
Billion Luck Company Ltd., supplementing Credit Agreement
dated June 1, 1994 (Filed
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<PAGE> 67
with Annual Report on Form 10-K/A for the fiscal year ended
December 31, 1994, and incorporated herein by reference.)
10.7 Letter Agreement dated October 24, 1994, by and among
Everbright Finance & Investment Co. Limited, Worlder
International Company Limited, and Billion Luck Company Ltd.
(Filed with Annual Report on Form 10-K/A for the fiscal year
ended December 31, 1994, and incorporated herein by
reference.)
10.8 Acquisition Agreement, by and among the Registrant and the
shareholders of Billion Luck Company Ltd. (Filed with Annual
Report on Form 10-K/A for the fiscal year ended December 31,
1994, and incorporated herein by reference.)
10.9 Agreement on Service and Cooperation dated November 5, 1994,
by and between Hainan Province Agricultural Reclamation
General Company (the Farming Bureau) and Hainan Agricultural
Resources Company Ltd. (Original Chinese version with English
translation filed with Annual Report on Form 10-K/A for the
fiscal year ended December 31, 1994, and incorporated herein
by reference.)
10.10 Land Use Agreement dated November 5, 1994, by and between
Hainan Province Agricultural Reclamation No. 1 Materials
Supply & Sales Company (First Supply) and Hainan Province
Agricultural Reclamation Jin Long Materials General Company
(Original Chinese version with certified English translation
filed with Annual Report on Form 10-K/A for the fiscal year
ended December 31, 1994, and incorporated herein by
reference.)herewith.)
10.11 Land Use Agreement dated November 5, 1994, by and between
Hainan Province Agricultural Reclamation No. 2 Materials
Supply & Sales Company (Second Supply) and Hainan Province
Agricultural Reclamation Jin Huan Materials General Company
(Original Chinese version with certified English translation
filed with Annual Report on Form 10-K/A for the fiscal year
ended December 31, 1994, and incorporated herein by
reference.)
10.12 Long-Term Sale and Purchase Agreement dated November 5, 1994,
by and among Hainan Province Agricultural Reclamation General
Company (the Farming Bureau), Hainan Agricultural Resources
Company Ltd., Hainan Province Agricultural Reclamation No. 1
Materials Supply & Marketing Company (First Supply), and
Hainan Province Agricultural Reclamation No. 2 Materials
Supply & Marketing Company (Second Supply) (Original Chinese
version with English translation filed with Annual Report on
Form 10-K/A for the fiscal year ended December 31, 1994, and
incorporated herein by reference.)
10.13 Agreement on Assignment of Accounts Receivable dated November
5, 1994, by and among Hainan Province Agricultural Reclamation
General Company (the Farming Bureau), Billion Luck Company
Ltd., Hainan Province Guilinyang State Farm, Hainan
Agricultural Resources Company Ltd., Hainan Province
Agricultural Reclamation No. 1 Materials Supply & Marketing
Company (First Supply), and Hainan Province Agricultural
Reclamation No. 2 Materials Supply & Marketing Company (Second
Supply) (Original Chinese version with English translation
filed with Annual Report on Form 10-K/A for the fiscal year
ended December 31, 1994, and incorporated herein by
reference.)
10.14 Rental Agreement, by and between General Bureau of Hainan
State Farms (the Farming Bureau) and Hainan Agricultural
Resources Company Limited (Original Chinese version with
English Translation filed with Annual Report on Form 10-K/A
for the fiscal year ended December 31, 1994, and incorporated
herein by reference.)
10.15 Guaranty Agreement, by and among Hainan Province Agricultural
Reclamation General Company (the Farming Bureau), Hainan
Agricultural Reclamation No. 1 Materials Supply & Sales
Company (First Supply) and Hainan Agricultural Reclamation No.
2 Materials Supply & Sales Company (Second Supply) (Original
Chinese version with certified English Translation filed with
Annual Report on Form 10-K/A for the fiscal year ended
December 31, 1994, and incorporated herein by reference.)
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<PAGE> 68
10.16 Financial Consulting Agreement dated February 1, 1994, by and
between Brender Services Limited and Billion Luck Company
Ltd., and Extension Agreement dated November 1, 1994, by and
between Brender Services Limited and Billion Luck Company Ltd.
(Filed with Annual Report on Form 10-K/A for the fiscal year
ended December 31, 1994, and incorporated herein by
reference.)
10.17 Exchange Agreement, by and among the Registrant, Hong Wah
Investment Holdings Limited, Everbright Finance & Investment
Co. Ltd., Worlder International Company Limited and Silverich
Limited, executed as of March 31, 1995 (Filed with Quarterly
Report on Form 10-Q/A for the fiscal quarter ended March 31,
1995, and incorporated herein by reference.)
10.18 China Resources Development, Inc., 1995 Stock Option Plan,
adopted as of March 31, 1995 (Filed with Quarterly Report on
Form 10-Q/A for the fiscal quarter ended March 31, 1995, and
the Current Report on Form 8-K dated June 19, 1995, and
incorporated herein by reference.)
10.19 Consulting Agreement between the Registrant and Brender
Services Limited, dated April 30, 1995 (Filed with Quarterly
Report on Form 10-Q for the fiscal quarter ended June 30,
1995, and incorporated herein by reference.)
10.20 Letter dated June 1, 1995, extending the repayment date to
December 31, 1995, for loans extended to Billion Luck by
Everbright Finance & Investment Co. Limited, Worlder
International Company Limited and Hong Wah Investment Holdings
Limited, pursuant to Credit Agreement dated June 1, 1994
(Filed with Quarterly Report on Form 10-Q for the fiscal
quarter ended September 30, 1995, and incorporated herein by
reference.)
10.21 Agreement on Administrative Expenses Apportionment between
First Supply and Jin Ling Corporation, dated March 15, 1995
(Original Chinese version with English translation filed
herewith.)
10.22 Agreement on Administrative Expenses Apportionment between
Second Supply and Jin Huan Corporation, dated March 15, 1995
(Original Chinese version with English translation filed
herewith.)
10.23 Agreement on Rubber Purchase Deposits among HARC, First
Supply, Second Supply and the Farming Bureau, dated March 30,
1995 (Original Chinese version with English translation filed
herewith.)
10.24 Employment Agreement between Billion Luck and Han Jian Zhun,
dated August 1, 1995 (Filed herewith.)
10.25 Employment Agreement between Billion Luck and Li Fei Lie,
dated August 1, 1995 (Filed herewith.)
10.26 Contract on Investment in the Xilian Timber Mill between HARC
and the State-Run Xilian Farm of Hainan Province dated July 7,
1994, and Supplementary Agreement dated December 24, 1994
(Original Chinese version with English translation filed
herewith.)
11.2 Computation of Earnings Per Share for Fiscal Year ended
December 31, 1995 (Filed herewith.)
16.1 Letter from H.J. Swart & Company, P.A., to Registrant dated
March 22, 1995 (Filed with Current Report on Form 8-K/A dated
March 16, 1995.)
21 Subsidiaries of the Registrant (Contained in Financial
Statements filed herewith.)
99.2 Copy of independent auditor's report, together with combined
financial statements of First Supply and Second Supply,
including (a) combined statements of income and equity for the
years ended December 31, 1992 and 1993, and for the six months
ended June 30, 1994; (b)
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<PAGE> 69
combined balance sheet as at December 31, 1993; (c) combined
statements of cash flows for the years ended December 31, 1992
and 1993, and for the six months ended June 30, 1994; and (d)
notes to combined financial statements (Contained in
Financial Statements filed herewith.)
During the last quarter of the fiscal year ended December 31, 1995,
the Company filed no reports on Form 8-K.
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<PAGE> 70
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
CHINA RESOURCES DEVELOPMENT, INC.
By:
------------------------------
Li Shunxing, President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Yang Jiangang Chairman of the Board of April 14, 1996
- ------------------------------ Directors
Yang Jiangang
/s/ Li Shunxing President/Director April 14, 1996
- ------------------------------
Li Shunxing
/s/ Wang Faren Vice Chairman of the April 14, 1996
- ------------------------------ Board of Directors
Wang Faren
/s/ Yiu Yat Hung Vice Chairman of the April 14, 1996
- ------------------------------ Board of Directors
Yiu Yat Hung
/s/ Han Jian Zhun Vice President/Director April 14, 1996
- ------------------------------
Han Jian Zhun
/s/ Tam Cheuk Ho Chief Financial Officer/ April 14, 1996
- ------------------------------ Director
Tam Cheuk Ho
/s/ Zhang Yibing Secretary/Director April 14, 1996
- ------------------------------
Zhang Yibing
/s/ Wong Wah On Financial Controller April 14, 1996
- ------------------------------
Wong Wah On
-41-
<PAGE> 71
APPENDIX A
Financial Statements
1. Manually signed, independent auditor's report, together with
consolidated financial statements for the Company and
subsidiaries, including:
a. Consolidated statements of income for the period from
December 14, 1993, to December 31, 1994, and for the
year ended December 31, 1995
b. Consolidated statements of changes in shareholders'
equity for the period from December 14, 1993, to
December 31, 1994, and for the year ended December
31, 1995
c. Consolidated balance sheets as of December 31, 1994
and 1995
d. Consolidated statements of cash flows for the period
from December 14, 1993, to December 31, 1994, and for
the year ended December 31, 1995
e. Notes to consolidated financial statements.
2. Copy of independent auditor's report, together with combined
financial statements of First Supply and Second Supply
(original manually signed report and financial statements
filed as Appendix A of the Company's Form 10-K/A for the
fiscal year ended December 31, 1994, are included herewith as
an exhibit and are incorporated herein by reference)
including:
a. Combined statements of income and equity for the
years ended December 31, 1992 and 1993, and for the
six months ended June 30, 1994
b. Combined balance sheet as at December 31, 1993
c. Combined statements of cash flows for the years ended
December 31, 1992 and 1993, and for the six months
ended June 30, 1994
d. Notes to combined financial statements.
3. Unaudited pro forma consolidated financial information of the
Company and subsidiaries, including:
a. Unaudited pro forma consolidated statement of income
for the year ended December 31, 1994
b. Unaudited pro forma consolidated statement of income
for the year ended December 31, 1993
c. Notes to unaudited pro forma consolidated financial
information.
-42-
<PAGE> 72
Consolidated Financial Statements
CHINA RESOURCES DEVELOPMENT INC AND SUBSIDIARIES
December 31, 1994 and 1995
<PAGE> 73
CHINA RESOURCES DEVELOPMENT INC AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Pages
-----
<S> <C>
Report of independent auditors 1
Consolidated statements of income 2
Consolidated statements of changes in
shareholders' equity 3
Consolidated balance sheets 4 - 5
Consolidated statements of cash flows 6
Notes to consolidated financial statements 7 - 36
</TABLE>
<PAGE> 74
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
China Resources Development Inc
We have audited the accompanying consolidated balance sheets of China
Resources Development Inc (the "Company") and subsidiaries (collectively the
"Group") as of December 31, 1994 and 1995, and the related consolidated
statements of income, changes in shareholders' equity, and cash flows for the
period from December 14, 1993 to December 31, 1994 and for the year ended
December 31, 1995. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of the Group at December 31, 1994 and 1995, and the consolidated results of
its operations and its cash flows for the period from December 14, 1993 to
December 31, 1994 and for the year ended December 31, 1995, in conformity
with accounting principles generally accepted in the United States of
America.
ERNST & YOUNG
Hong Kong
March 9, 1996
1
<PAGE> 75
CHINA RESOURCES DEVELOPMENT INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Amounts in thousands except share and per share data)
<TABLE>
<CAPTION>
Series B
Series A convertible Additional
Common preferred preferred paid-in Retained
Notes stock stock stock capital Reserves earnings
RMB RMB RMB RMB RMB RMB
<S> <C> <C> <C> <C> <C> <C> <C>
1,200,000 shares of common
stock outstanding after a
reverse stock split of
6.67 to 1 1 10 - - 638 - -
Issuance of 10,800,000
shares of common stock
pursuant to the Reverse
Acquisition (as defined
hereinafter) 1 91 - - 769 - -
Net income - - - - - 10,282
Transfer to reserves 21 - - - - 2,657 (2,657)
------ --------- ----------- ---------- -------- -------
Balance at December 31,
1994 101 - - 1,407 2,657 7,625
Issuance of 6,400,000
shares of series A
preferred stock 14 - 53,930 - - - -
Issuance of 370 shares of
series B convertible
preferred stock, net of
share issuance costs 14 - - - 19,554 - -
Net income - - - - - 19,175
Transfer to reserves 21 - - - - 6,273 (6,273)
------ --------- ----------- ---------- -------- -------
Balance at December 31,
1995 101 53,930 - 20,961 8,930 20,527
==== ====== ==== ====== ===== ======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE> 76
CHINA RESOURCES DEVELOPMENT INC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands except share and per share data)
<TABLE>
<CAPTION>
December 31,
1994 1995 1995
Notes RMB RMB US$
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents 69,157 56,942 6,844
Trade receivables 21,996 31,991 3,845
Other receivables, deposits and
prepayments 44,622 52,871 6,354
Inventories 8 91,751 103,776 12,473
Amounts due from related companies 16 243,638 288,503 34,676
Amount due from Farming Bureau 16 - 80,427 9,667
Other current assets 9,071 19,448 2,338
------- ------- ------
TOTAL CURRENT ASSETS 480,235 633,958 76,197
FIXED ASSETS 9 20,645 21,491 2,583
CONSTRUCTION IN PROGRESS 19,299 - -
INVESTMENTS 10 12,022 11,963 1,438
GOODWILL 1,104 1,076 129
------- ------- ------
TOTAL ASSETS 533,305 668,488 80,347
======= ======= ======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE> 77
CHINA RESOURCES DEVELOPMENT INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share and per share data)
1. ORGANIZATION AND PRINCIPAL ACTIVITIES
China Resources Development Inc (the "Company") was formerly known as
Magenta Corporation ("Magenta") which was incorporated in the State of
Nevada, the United States of America.
On December 2, 1994, pursuant to an Acquisition Agreement amongst
Magenta and the shareholders (the "Billion Luck Shareholders") of
Billion Luck Company Limited ("Billion Luck") the following occurred:
(i) Magenta changed its name to China Resources Development Inc;
(ii) a reverse stock split of 6.67 to 1 such that, immediately prior to
the closing under the Acquisition Agreement, there were 1.2 million
issued and outstanding shares of common stock of US$0.001 par value
and no other debt or equity securities of Magenta were outstanding;
and
(iii) the issuance to the Billion Luck Shareholders of an aggregate of
10,800,000 shares of common stock of the Company in exchange for
all of the issued and outstanding capital stock of Billion Luck.
As a result of the closing of the Acquisition Agreement, the Billion
Luck Shareholders owned 90% of the resulting outstanding common stock of
the Company.
The above transaction has been treated as a recapitalization of Billion
Luck with Billion Luck as the acquirer (the "Reverse Acquisition").
Accordingly, the historical financial statements prior to December 2,
1994 are those of Billion Luck.
Billion Luck was incorporated in the British Virgin Islands (the "BVI")
on December 14, 1993. Billion Luck's principal activity is to conduct
activities through its subsidiary companies and its principal asset is a
56% equity interest in Hainan Agricultural Resources Company Limited
("Hainan Agricultural").
Pursuant to an agreement dated January 31, 1994 between Billion Luck,
Guilinyang State Farm, and the Hainan Farming Bureau (the "Farming
Bureau"), a division of the Ministry of Agriculture of the People's
Republic of China (the "PRC"), Hainan Agricultural was established as a
joint stock company in the PRC on June 28, 1994 to act as the holding
company of First Goods And Materials Supply And Sales Corporation ("First
Supply") and Second Goods And Materials Supply And Sales Corporation
("Second Supply") which are principally engaged in the distribution of
natural rubber and the procurement of materials and supplies.
8
<PAGE> 78
CHINA RESOURCES DEVELOPMENT INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share and per share data)
1. ORGANIZATION AND PRINCIPAL ACTIVITIES (continued)
Hainan Agricultural has a registered capital of RMB100,000. The
contributions to the registered capital are as follows:
<TABLE>
<S> <C>
Billion Luck 56%
Guilinyang State Farm 5%
Farming Bureau 39%
</TABLE>
2. BASIS OF PRESENTATION
The consolidated financial statements included the accounts of the
Company and its subsidiaries (collectively the "Group") as if the
Reverse Acquisition as set out in note 1 had been completed on December
14, 1993.
The consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America
("US GAAP"). This basis of accounting differs from that used in the
statutory financial statements of the subsidiaries in the PRC which are
prepared in accordance with the accounting principles and the relevant
financial regulations in the PRC.
The principal adjustment made to conform with US GAAP was the write-off
of pre-operating expenses in the period of occurrence.
3. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES
(a) Basis of consolidation
The consolidated financial statements of the Company include the
accounts of the Company and its subsidiaries. The results of the
subsidiaries of Billion Luck are consolidated from their effective
date of acquisition. All material intercompany balances and
transactions have been eliminated on consolidation.
(b) Cash and cash equivalents
The Group considers cash and cash equivalents to include cash on
hand and demand deposits with banks with original terms to
maturity of three months or less.
At December 31, 1994 and 1995, cash and cash equivalents included
foreign currency deposits equivalent to RMB2,593 (US$177 and
HK$1,004) and RMB17,839 (US$2,003 and HK$1,092), respectively.
9
<PAGE> 79
CHINA RESOURCES DEVELOPMENT INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share and per share data)
3. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (continued)
(c) Inventories
Inventories are stated at the lower of cost or market. Cost is
determined using the first-in, first-out method.
(d) Fixed assets and depreciation
Fixed assets are stated at cost less accumulated depreciation.
Depreciation of fixed assets is calculated on the straight-line
basis to write off the cost less estimated residual value of
each asset over its estimated useful life. The principal
annual rates used for this purpose are as follows:
<TABLE>
<S> <C>
Buildings 4%
Plant, machinery and equipment 10%
Transportation vehicles and equipment 8-10%
</TABLE>
(e) Investments
Investments are stated at cost less provisions for known losses
and permanent diminutions in value, if any.
(f) Foreign currency translations
The subsidiaries' financial records except for Billion Luck are
maintained and the statutory financial statements are stated in
Renminbi ("RMB"), the national currency of the PRC.
Foreign currency transactions and monetary assets and liabilities
denominated in foreign currency are translated into RMB at the
respective applicable rates of exchange quoted by the People's
Bank of China (the "Unified Exchange Rate"). Monetary assets and
liabilities denominated in foreign currencies are translated into
RMB at the applicable Unified Exchange Rate at the respective
balance sheet dates. The resulting exchange gains or losses are
credited or charged to the consolidated statements of income.
The books and records of the Company and Billion Luck are
maintained in United States dollars ("US$") and Hong Kong
dollars, respectively. The records of the Company and Billion
Luck are remeasured into RMB using the respective applicable
Unified Exchange Rate prevailing at the date of the transactions.
Monetary assets and liabilities in Hong Kong dollars and other
foreign currencies are translated using the applicable Unified
Exchange Rate at the balance sheet dates. The resulting exchange
gains or losses are credited or charged to the consolidated
statements of income.
10
<PAGE> 80
CHINA RESOURCES DEVELOPMENT INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share and per share data)
3. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (continued)
(f) Foreign currency translations (continued)
Translation of amounts from RMB into US$ for the convenience of
the reader has been made at the Unified Exchange Rate quoted by
the People's Bank of China on December 31, 1995 of US$1.00 =
RMB8.32, and, accordingly, differs from the underlying foreign
currency amounts. No representation is made that the RMB amounts
could have been, or could be, converted into US$ at that rate on
December 31, 1995 or at any other date.
The market risks associated with changes in exchange rates and the
restrictions over the convertibility of RMB into foreign currencies
are discussed in note 23.
(g) Revenue recognition
Sales represent the invoiced value of goods sold, net of returns.
Revenue is recognized upon delivery of goods to customers.
(h) Retirement benefits
Retirement benefits paid to retired employees are charged to the
statements of income as services are provided.
(i) Goodwill
Goodwill is amortised on the straight line basis over 40 years.
(j) Earnings per share
The computation of primary earnings per share for the year ended
December 31, 1995 is based on the weighted average number of common
stock outstanding after giving effect to dilutive stock options and
series B convertible preferred stock, which are included as common
share equivalents using the treasury stock method and assumed to
be converted to common stock, respectively. The number of shares
used in computing the primary earnings per share was 12,326,068.
Fully diluted earnings per share is not materially different from
primary earnings per share.
For the period from December 14, 1993 to December 31, 1994, primary
earnings per share is based on an aggregate of 12,000,000 shares of
common stock outstanding as if the Reverse Acquisition had been
completed on December 14, 1993.
11
<PAGE> 81
CHINA RESOURCES DEVELOPMENT INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share and per share data)
3. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (continued)
(k) Use of estimates
The preparation of consolidated financial statements in conformity
with US GAAP requires management to make estimates and assumptions
that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ
from those estimates.
(l) Income taxes
Income taxes have been provided using the liability method in
accordance with Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes".
(m) Construction in progress
Construction in progress represents warehouses under construction
and are stated at cost. Cost comprises direct cost of
construction and interest charges during the period of
construction. Capitalization of interest charges ceases when an
asset is ready for its intended use.
(n) Futures contracts
The Group enters into natural rubber commodity futures contracts to
hedge the price risk associated with certain firm commitments for
the purchase of natural rubber. Any gains or losses on qualifying
hedges are deferred and included as part of the cost of inventories
received under the firm purchase commitments.
As of December 31, 1995, the Group had deferred losses from such
contracts of RMB5,054 (1994: Nil) which was recorded as other
current asset.
The Group also enters into natural rubber commodity futures
contracts that are not specific hedges and gains or losses
resulting from changes in the market value of these types of
futures contracts are recognized as income in the period of the
change.
For the year ended December 31, 1995, the Group realized a net gain
of RMB10,614 on such transactions (note 5).
12
<PAGE> 82
CHINA RESOURCES DEVELOPMENT INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share and per share data)
4. FINANCIAL INCOME/(EXPENSES), NET
Financial income/(expenses), net represent:
<TABLE>
<CAPTION>
Period from
December 14,
1993 to Year ended
December 31, December 31,
1994 1995
RMB RMB
<S> <C> <C>
Interest expenses (22,951) (52,409)
Interest income 25,879 18,575
Foreign exchange gains/(losses), net (360) 622
------- -------
2,568 (33,212)
======= =======
</TABLE>
5. OTHER INCOME
Other income represents:
<TABLE>
<CAPTION>
Period from
December 14,
1993 to Year ended
December 31, December 31,
1994 1995
Notes RMB RMB
<S> <C> <C> <C>
Income from long term investments 1,033 2,000
Net rental income 1,235 5,297
Net gains on trading of natural rubber
futures contracts 3(n) - 10,614
Management fees income 16(k) - 6,000
Others 3,344 4,743
----- ------
5,612 28,654
===== ======
</TABLE>
13
<PAGE> 83
CHINA RESOURCES DEVELOPMENT INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share and per share data)
6. REORGANIZATION EXPENSES
During the period from December 14, 1993 to December 31, 1994, concurrent
with the issuance to the Billion Luck Shareholders an aggregate of
10,800,000 shares of common stock of the Company in exchange for all of the
issued and outstanding capital stock of Billion Luck, reorganization
expenses were incurred which reduced net income by RMB3,029. The
reorganization expenses included RMB2,103 and a 10% shareholding in the
Company valued at RMB648 for the acquisition of the Company and RMB278 of
consultancy fees and certain corporate reorganization costs incurred.
7. INCOME TAXES
It is management's intention to reinvest all the income attributable to
the Company earned by its operations outside the United States of America
up to December 31, 1995. Accordingly, no United States corporate income
taxes have been provided in these financial statements.
Under current British Virgin Islands' law, any dividends the Group will
distribute in future, and capital gains arising from the Group's
investments are not subject to income taxes in the British Virgin Islands.
Being wholly-owned subsidiaries of Hainan Agricultural, a Sino-foreign
joint stock company having 56% of its outstanding shares held by a foreign
owner, First Supply and Second Supply are now governed by the Income Tax
Law of the People's Republic of China concerning Foreign Investment
Enterprises and Foreign Enterprises and various local income tax laws (the
"Income Tax Laws"). Since First Supply and Second Supply are located in
Hainan, a Special Economic Zone, management expects that these subsidiaries
will be entitled, from the date of completion of the corporate
restructuring, to a preferential tax rate of 15% on income as reported in
their statutory financial statements. Management is still in the process
of registering First Supply and Second Supply with the PRC tax authority.
A full tax provision at 15% on income of First Supply and Second Supply has
been made in the financial statements.
Current income taxes were provided at 15% on income of First Supply and
Second Supply for the period from June 28, 1994 to December 31, 1994 and
for the year ended December 31, 1995.
Hainan Agricultural has been granted a tax holiday under the Income Tax
Laws with a tax exemption in the first year which is the period from June
28, 1994 to December 1994 (tax saving attributable to the Group of RMB281
or RMB0.023 per share) and a 50% tax deduction in the second year of
operation which is the year ended December 31, 1995 (tax saving
attributable to the Group of RMB209 or RMB0.017 per share).
14
<PAGE> 84
CHINA RESOURCES DEVELOPMENT INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share and per share data)
7. INCOME TAXES (continued)
A reconciliation between the actual income tax expenses and income taxes
computed by applying the statutory PRC tax rate applicable to foreign
investment enterprises operating in Hainan, a Special Economic Zone in
the PRC, to the income before income taxes is as follows:
<TABLE>
<CAPTION>
Period from
December 14,
1993 to Year ended
December 31, December 31,
1994 1995
RMB RMB
<S> <C> <C>
Statutory PRC tax rate 15% 15%
Computed expected tax expenses 3,650 6,636
Impact of tax holiday of Hainan Agricultural (502) (374)
Item which gives rise to no tax benefit:
Net loss of the Company and Billion Luck 690 669
Others (175) (22)
----- -----
3,663 6,909
===== =====
</TABLE>
Undistributed earnings of the Company's foreign subsidiaries amounted to
RMB22,995 at December 31, 1995. Because those earnings are considered to
be indefinitely invested, no provision for United States corporate income
taxes on those earnings has been provided. Upon distribution of those
earnings in the form of dividends or otherwise, the Company would be
subject to United States corporate income taxes. Unrecognized deferred
United States corporate income taxes in respect of these undistributed
earnings as at December 31, 1995 was RMB7,818.
No deferred income taxes have been provided based on the liability method
prescribed by Statement of Financial Accounting Standards No. 109 because
the effect of all other temporary differences is considered minimal.
15
<PAGE> 85
CHINA RESOURCES DEVELOPMENT INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share and per share data)
8. INVENTORIES
Inventories comprise:
<TABLE>
<CAPTION>
December 31,
1994 1995
RMB RMB
<S> <C> <C>
Finished goods 91,751 105,002
Less: Provision for diminution in value - (1,226)
------ ------
Finished goods, net 91,751 103,776
====== =======
</TABLE>
<TABLE>
<CAPTION>
Period from
December 14,
1993 to Year ended
December 31, December 31,
1994 1995
RMB RMB
<S> <C> <C>
Movement of provision for diminution
in value:
Balance at beginning of period/year - -
Provision for the period/year - 1,226
----- -----
Balance at end of period/year - 1,226
===== =====
</TABLE>
16
<PAGE> 86
CHINA RESOURCES DEVELOPMENT INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share and per share data)
9. FIXED ASSETS
Fixed assets comprise:
<TABLE>
<CAPTION>
December 31,
1994 1995
RMB RMB
<S> <C> <C>
Cost:
Buildings 5,859 5,739
Plant, machinery and equipment 9,099 10,267
Transportation vehicles and equipment 6,816 8,448
------ ------
21,774 24,454
------ ------
Accumulated depreciation:
Buildings 393 607
Plant, machinery and equipment 542 1,563
Transportation vehicles and equipment 194 793
------ ------
1,129 2,963
------ ------
Net book value 20,645 21,491
====== ======
All of the Group's buildings are located in the PRC.
</TABLE>
The rights to use the land on which the buildings were erected were
granted by the relevant PRC authorities, for an unspecified expiry period,
to two related companies owned and controlled by the Farming Bureau. The
Group agreed to assume the payment of the related land use tax in
consideration for the granting of a right to occupy the land. The related
land use taxes for the year ended December 31, 1995 amounted to RMB430
(1994: RMB201).
17
<PAGE> 87
CHINA RESOURCES DEVELOPMENT INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share and per share data)
10. INVESTMENTS
Investments comprise:
<TABLE>
<CAPTION>
December 31,
1994 1995
RMB RMB
<S> <C> <C>
At cost:
Unlisted shares 1,209 1,310
PRC government bonds 813 653
PRC joint ventures 10,000 10,000
------ ------
12,022 11,963
====== ======
</TABLE>
The PRC joint ventures represent investments of RMB5,000 each in two
joint ventures by Hainan Agricultural in Hainan State-owned Xilian Farm
Timber Mill ("Xilian Mill") and Zhong Ya Aluminum Factory ("Zhong Ya").
Hainan Agricultural holds an equity interest of 12.64% in Xilian Mill
and an equity interest of 5.47% (1994: 6.6%) in Zhong Ya as at December
31, 1995.
11. BANK LOANS
The Group's short term bank loans are all denominated in Renminbi and are
used primarily to finance working capital needs. The short term bank loans
are generally secured by guarantees given by the Farming Bureau, with
original maturities not more than one year at a weighted average interest
rate of 18.25% per annum as at December 31, 1995 (1994: 13.176% per annum).
The Farming Bureau has agreed to arrange alternative financing for First
Supply and Second Supply to meet their liabilities at any time should the
banks terminate the bank financing.
12. SHORT TERM ADVANCES
As of December 31, 1995, the Group had short term advances of RMB86,917
(1994: Nil) from China Commodity Futures Exchange Inc, a futures exchange
in Hainan, the PRC, to finance the Group's working capital needs in the
purchase of natural rubber. The amount is unsecured, interest-free and has
no fixed terms of repayment.
18
<PAGE> 88
CHINA RESOURCES DEVELOPMENT INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share and per share data)
13. LONG TERM LOANS FROM SHAREHOLDERS
As at December 31, 1994, the Group had long term loans (the "Loans") from
certain shareholders of the Company (the "Loan Holders"), which were
denominated in United States dollars, amounting to US$6,427 and were
unsecured and interest-free.
The Company entered into an agreement dated as of March 31, 1995 (the
"Exchange Agreement") with the Loan Holders pursuant to which US$6,400
of the Loans were exchanged for the issuance to the Loan Holders
6,400,000 shares of series A preferred stock of the Company at a par
value of US$1 per share (note 14).
14. SHARE CAPITAL
On December 2, 1994, pursuant to the Reverse Acquisition set out in note
1, the Company underwent a reverse stock split such that, immediately
prior to the closing under the Acquisition Agreement, there were 1.2
million issued and outstanding shares of common stock of US$0.001 par
value each. On closing of the Acquisition Agreement, the Company
acquired all of the issued and outstanding shares of Billion Luck by the
issue of an aggregate of 10,800,000 shares of common stock of US$0.001
par value each of the Company. The difference between the nominal value
of the Company's shares issued under the Reverse Acquisition and the
paid up value of the shares of Billion Luck was credited as additional
paid-in capital.
The Board of Directors of the Company approved an Action by Written
Consent dated as of March 31, 1995 to amend the Company's Articles of
Incorporation to authorize 10,000,000 shares of preferred stock, of
which 6,400,000 shares were designated as series A preferred stock, par
value US$1 per share.
Pursuant to the above-mentioned Action by Written Consent and the
Exchange Agreement as set out in note 13, long term loans from certain
shareholders of the Company of US$6,400 were exchanged for 6,400,000
shares of series A preferred stock of the Company.
The series A preferred stock ranks senior to common stock with respect
to dividends and other distribution rights and rights upon liquidation,
winding up and dissolution. Each holder of the series A preferred stock
shall have that number of votes on all matters submitted to shareholders
equal to the number of shares of series A preferred stock held by such
holder. The holders of series A preferred stock are entitled to receive
noncumulative annual dividends payable starting from January 1, 1997 at
a rate of 4% per annum prior to the payment of dividends on the common
stock. The Board of Directors of the Company has the option to redeem
the series A preferred stock in whole or in part at any date on or after
January 1, 1997 on not less than 10 days' notice to the holders.
On December 9, 1995, the Company designated a series of 2,500 shares of
the Company's authorized preferred stock as series B convertible
preferred stock, par value US$0.001 per share.
19
<PAGE> 89
CHINA RESOURCES DEVELOPMENT INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share and per share data)
14. SHARE CAPITAL (continued)
The Company issued a Confidential Offshore Offering Memorandum on
October 20, 1995 and a Supplementary Memorandum on December 7, 1995 to
offer for sale to certain non-residents of the United States of America
in an offshore offering in reliance upon Regulation S promulgated under
the Securities Act of 1933, as amended, shares of common stock and
series B convertible preferred stock of the Company (the "Share
Offering"). As of December 31, 1995, gross proceeds of US$3,700 were
received on the issuance of 370 shares of series B convertible preferred
stock at a price of US$10,000 per share. Subsequent to the balance
sheet date, the Share Offering was completed and as of March 8, 1996,
the closing date of the Share Offering, further gross proceeds of
US$8,830 were received upon the issuance of 883 shares of series B
convertible preferred stock at a price of US$10,000 per share.
Each share of series B convertible preferred stock is convertible at the
holder's option into the Company's common stock at any time during the
two-year period commencing on the 45th day following the date of the
closing of the sale of such shares (the "Conversion Period"). The
number of shares of common stock issuable upon conversion of shares of
series B convertible preferred stock shall equal the number of shares of
series B convertible preferred stock to be converted, multiplied by
US$10,000 per share divided by the lesser of (a) the product derived by
multiplying (1) the average closing bid price of the common stock on the
electronic inter-dealer quotation system operated by Nasdaq, Inc., a
subsidiary of the National Association of Securities Dealers, Inc. (the
"NASDAQ System"), for the five consecutive trading days immediately
preceding the date of the delivery of a notice of conversion to the
Company by (ii) 69%, or (b) the product derived by multiplying (i) the
average closing bid price of the common stock on the NASDAQ System for
the five consecutive trading days immediately preceding the date of the
delivery of a subscription agreement for the series B convertible
preferred stock to the Company under the Share Offering by (ii) 85%.
Upon the expiration of the Conversion Period, all remaining issued and
outstanding shares of series B convertible preferred stock shall be
converted as of such expiration date into the appropriate number of
shares of common stock in accordance with the above referenced formula.
The holders of series B convertible preferred stock are not entitled to
any voting rights and have no preemptive or other subscription rights
and are not subject to any future calls or assessments. There are no
redemption of sinking fund provisions applicable to shares of series B
convertible preferred stock, and holders of series B convertible
preferred stock have no rights whatsoever to dividends or to
distributions upon liquidation or dissolution of the Company.
20
<PAGE> 90
CHINA RESOURCES DEVELOPMENT INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share and per share data)
15. STOCK OPTIONS
The Company adopted a stock option plan (the "Plan") as of March 31,
1995. The Plan allows the Board of Directors, or a committee thereof at
the Board's discretion, to grant stock options to officers, directors,
key employees, consultants and affiliates of the Company. Initially,
2,400,000 shares of common stock may be issued and sold pursuant to
options granted under the Plan. All of the stock options were issued in
accordance with the terms of the Plan on July 1, 1995 to certain
officers, directors, employees and consultants of the Group at an
exercise price of US$3.78 (RMB31.45) per share (the fair market value of
the common stock as of July 1, 1995) and are exercisable from July 1,
1996 to July 1, 2005. All stock options remained outstanding at the
date of preparation of these financial statements.
16. RELATED PARTY BALANCES AND TRANSACTIONS
The Group's amounts due from/to farms (the "Farms") and other related
companies owned and/or controlled by the Farming Bureau comprise:
<TABLE>
<CAPTION>
December 31,
1994 1995
RMB RMB
<S> <C> <C>
Due from related companies:
Deposits paid to Farms and other related
companies for the purchase of natural
rubber (see note(b) below) - 262,104
Advances to Farms 156,915 9,395
Advances to Jin Long Corporation
("Jin Long") 50,282 5,657
Advances to Jin Huan Corporation
("Jin Huan") 28,225 5,134
Advances to other related companies 8,216 6,213
------- -------
243,638 288,503
======= =======
Due to related companies:
Farms 9,527 13,634
Other related companies 10,440 9,020
------- -------
19,967 22,654
======= =======
</TABLE>
21
<PAGE> 91
CHINA RESOURCES DEVELOPMENT INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share and per share data)
16. RELATED PARTY BALANCES AND TRANSACTIONS (continued)
The weighted average interest rates per annum charged on the balances
with the above related companies, the Farming Bureau and the
shareholders of the Company are summarized as follows:
<TABLE>
<CAPTION>
December 31,
1994 1995
<S> <C> <C>
Due from related companies:
Deposits paid to Farms and other
related companies for the
purchase of natural rubber N/A Interest-free
Advances to Farms 13.176% 18.250%
Advances to Jin Long 13.176% 18.250%
Advances to Jin Huan Rental income 18.25% plus rental
from certain income from
properties owned certain
by Jin Huan in properties owned
lieu of interest by Jin Huan
Advances to other related Interest-free Interest-free,
companies except for
RMB3,350 at
14.472%
Due to related companies:
Farms Interest-free Interest-free
except for
RMB3,500 at 18%
Other related companies Interest-free Interest-free
Due to the Farming Bureau Interest-free N/A
except for
RMB4,010 at
13.176%
Due from the Farming Bureau N/A 18.250%
Due to shareholders 9.730% 10.230%
</TABLE>
The deposits paid for the purchase of natural rubber will be set off against
the future receipt of natural rubber.
All of the amounts due from related companies are secured by a guarantee given
by the Farming Bureau. The balances with the Farming Bureau and the
shareholders of the Company are unsecured.
22
<PAGE> 92
CHINA RESOURCES DEVELOPMENT INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share and per share data)
16. RELATED PARTY BALANCES AND TRANSACTIONS (continued)
A significant portion of transactions undertaken by the Group has been
effected with the Farming Bureau and companies owned and/or controlled
by the Farming Bureau which were summarized as follows:
(a) Sales of rubber products
Pursuant to a sales and purchase agreement dated November 5, 1994
amongst the Farming Bureau, Hainan Agricultural, First Supply and
Second Supply, the Farming Bureau agreed to guarantee the supply of
natural rubber to Hainan Agricultural, First Supply and Second
Supply for a period of 15 years from November 5, 1994 under the same
terms and conditions as are offered to other purchasers of natural
rubber with a first right of refusal to First Supply and Second
Supply. First Supply and Second Supply also, from time to time,
sourced natural rubber from other farms not owned or controlled by
the Farming Bureau. The Farming Bureau also agreed to purchase
certain products sourced by First Supply and Second Supply for a
period of 15 years from November 5, 1994 at prices acceptable to all
parties with a first right of refusal to First Supply and Second
Supply.
(b) Sales and purchases with the Farming Bureau
The Farming Bureau allows First Supply and Second Supply to set
the selling price of natural rubber according to market conditions,
and guarantees a minimum gross profit margin of 3.5% (before
purchase discounts set out below) earned by First Supply and Second
Supply on natural rubber purchased from the Farms owned and/or
controlled by the Farming Bureau.
On March 30, 1995, the Group entered into an agreement with the
Farming Bureau pursuant to which, with effect from March 30, 1995,
the Farming Bureau guarantees the supply of a minimum of 120,000
tonnes (the "Guaranteed Quantity") of natural rubber for each of the
next 3 years. The Group is not obligated to purchase the Guaranteed
Quantity. In consideration for this, the Group has maintained a
purchase deposit on a rolling basis equivalent to 15% of the
Guaranteed Quantity multiplied by the average market price of
natural rubber for the previous quarter. In return, a purchase
discount is offered to the Group for the purchase of natural rubber
from the Farms.
23
<PAGE> 93
CHINA RESOURCES DEVELOPMENT INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share and per share data)
16. RELATED PARTY BALANCES AND TRANSACTIONS (continued)
(b) Sales and purchases with the Farming Bureau (continued)
Purchase and sales transactions with the Farms and other related
companies were as follows:
<TABLE>
<CAPTION>
Period from
December 14,
1993 to Year ended
December 31, December 31,
1994 1995
RMB RMB
<S> <C> <C>
Purchases of natural rubber from 855,805 1,652,707
the Farms 28,893 88,564
Sales of goods to the Farms
Sales of goods to other related 31,474 19,158
companies (excluding the Farms) ======= =========
(c) Interest income and expenses
Period from
December 14,
1993 to Year ended
December 31, December 31,
1994 1995
RMB RMB
Interest income and rental in
lieu of interest received from:
Farming Bureau - 5,596
Related companies 20,311 8,953
------ ------
20,311 14,549
====== ======
Interest expenses paid to:
Farming Bureau 69 679
Shareholders of the Company 167 1,378
------ ------
236 2,057
====== ======
</TABLE>
(d) Retirement plans
First Supply and Second Supply participate in a defined
contribution retirement plan administered by a State-owned
insurance company controlled by the Farming Bureau. Contributions
made to the retirement plan during the year ended December 31, 1995
were RMB1,591 (1994: RMB975).
24
<PAGE> 94
CHINA RESOURCES DEVELOPMENT INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share and per share data)
16. RELATED PARTY BALANCES AND TRANSACTIONS (continued)
(e) Transfers of assets
<TABLE>
<CAPTION>
Period from
December 14,
1993 to Year ended
December 31, December 31,
1994 1995
RMB RMB
<S> <C> <C>
Disposal of construction in
progress to Jin Long - 19,299
Disposal of fixed assets and
construction in progress to
Jin Huan 1,927 -
Disposal of fixed assets to
Jin Long - 1,773
</TABLE>
(f) Acquisition agreement
Pursuant to an agreement dated July 11, 1994 entered into between
Hainan Agricultural and Guilinyang State Farm, Hainan Agricultural
acquired from Guilinyang State Farm a 6.6% equity interest in
Zhong Ya for a cash consideration of RMB5,000.
Pursuant to the agreement, Hainan Agricultural is entitled to a
minimum annual return of RMB1,000 in Zhong Ya for a two year period
from the date of acquisition. Thereafter, Hainan Agricultural will
be entitled to Zhong Ya's profit in proportion to its shareholding
therein.
(g) Assignment agreement
Pursuant to an assignment agreement dated January 21, 1994 between
Billion Luck and Hong Wah (Holdings) Limited ("Hong Wah Holdings"),
which is owned by the shareholders of Hong Wah Investment Holdings
Limited, a shareholder of the Company, Billion Luck paid a sum of
HK$1,000 (RMB1,091) to Hong Wah Holdings in consideration for the
assignment of the right for the formation of Hainan Agricultural to
Billion Luck.
25
<PAGE> 95
CHINA RESOURCES DEVELOPMENT INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share and per share data)
16. RELATED PARTY BALANCES AND TRANSACTIONS (continued)
(h) Service fee payable to the Farming Bureau
Pursuant to an agreement dated November 5, 1994 between the Farming
Bureau and Hainan Agricultural, the Farming Bureau has agreed to
grant Hainan Agricultural certain land use and development rights
to the land on which the warehouse, factories, and other industrial
and office facilities of Hainan Agriculatural, First Supply and
Second Supply are located and to provide certain related services
to Hainan Agricultural. In consideration for this, the Farming
Bureau is entitled to an annual service fee to a maximum of
RMB5,000, calculated at 10 per cent of Hainan Agricultural's annual
consolidated net income before the service fee as determined in
accordance with US GAAP, provided that the annual consolidated net
income exceeds RMB40,000 after deducting such service fee. The
Farming Bureau was not entitled to such service fee for the year
ended December 31, 1995 and for the period from December 14, 1993
to December 31, 1994 because the above-mentioned condition was not
met in both periods.
(i) Rental agreement with the Farming Bureau
On July 15, 1994, Hainan Agricultural entered into a rental
agreement with the Farming Bureau for the rental of a portion of a
building located in Hainan, the PRC commencing October 1, 1994.
The rental agreement is for a period of 10 years at an annual
rental of RMB170 payable in equal semi-annual instalments. For the
year ended December 31, 1995, rental charges of RMB170 were paid to
the Farming Bureau (1994: RMB43).
(j) Consultancy fees
Pursuant to a mandate letter dated February 1, 1994, which was
amended on November 1, 1994, between Billion Luck and Brender
Services Limited ("Brender"), a shareholder of the Company, Billion
Luck agreed to pay Brender consultancy fees of HK$80 (RMB89) per
month and pursuant to a revised consulting agreement dated April
30, 1995, Brender agreed to provide accountancy and consulting
services to the Company for a period of 5 years commencing on May
1, 1995. In consideration of the services to be rendered, the
monthly consultancy fees paid by Billion Luck were increased to
HK$170 (RMB184) per month during May 1, 1995 to April 30, 1997.
For the remaining three years starting from May 1, 1997 onwards,
the consultancy fees are to be agreed upon by Billion Luck and
Brender, but not less than HK$170 (RMB184) per month. For the
period from December 13, 1993 to December 31, 1994 and for the year
ended December 31, 1995, consultancy fees of HK$880 (RMB979) and
HK$1,680 (RMB1,815) were paid to Brender, respectively.
26
<PAGE> 96
CHINA RESOURCES DEVELOPMENT INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share and per share data)
16. RELATED PARTY BALANCES AND TRANSACTIONS (continued)
(k) Management fees income from Jin Long and Jin Huan
For the year ended December 31, 1995, management fees of RMB3,000
were charged to each of Jin Long and Jin Huan for their share of
the Group's administrative expenses and for their use of the
Group's office equipment, warehouses and staff.
(l) Handling fees paid on trading of natural rubber futures
The Group engaged in the trading of natural rubber futures through
a broker owned by Jin Huan and paid handling fees to the broker
amounting to RMB4,424 for the year ended December 31, 1995 (1994:
Nil).
(m) Set off of trade receivables
Pursuant to a set-off agreement dated November 5, 1994 (the
"Agreement") amongst the Farming Bureau, Billion Luck, Guilinyang
State Farm, Hainan Agricultural, First Supply and Second Supply,
First Supply and Second Supply's trade receivables outstanding as
of June 28, 1994, the date of the establishment of Hainan
Agricultural, that had remained unsettled as at September 30, 1994
were set off against the respective current account balances
payable to the Farming Bureau. The total amount set off under the
Agreement was RMB100,947.
27
<PAGE> 97
CHINA RESOURCES DEVELOPMENT INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share and per share data)
17. ACQUISITION OF HAINAN AGRICULTURAL
The fair value of assets/liabilities of First Supply and Second Supply
as at June 28, 1994 contributed by the Farming Bureau for the subscription
of the 39% equity interest in Hainan Agricultural, as set out in note 1,
are as follows:
<TABLE>
<S> <C>
RMB
Cash and cash equivalents 48,458
Trade receivables 115,646
Other receivables and prepayments 31,255
Inventories 66,849
Amounts due from related companies 353,190
Fixed assets 16,661
Construction in progress 14,050
Investments 2,148
Bank loans (327,303)
Amount due to Farming Bureau (111,868)
Amounts due to related companies (66,993)
Accounts payable (77,109)
Accrued liabilities (25,984)
--------
Fair value of net assets contributed 39,000
========
</TABLE>
Billion Luck acquired its 56% interest in Hainan Agricultural on June
28, 1994 for a consideration of RMB56,000. The purchase method was used
to account for this acquisition. The results of Hainan Agricultural are
consolidated from the date of acquisition.
28
<PAGE> 98
CHINA RESOURCES DEVELOPMENT INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share and per share data)
17. ACQUISITION OF HAINAN AGRICULTURAL (continued)
The unaudited consolidated results of operations on a pro forma basis as
if First Supply and Second Supply had been acquired as of January 1,
1993 are as follows:
<TABLE>
<CAPTION>
Year ended December 31,
1993 1994
RMB RMB
<S> <C> <C>
(Unaudited) (Unaudited)
Sales 1,479,201 1,754,288
Sales taxes (6,391) -
---------- ----------
Net sales 1,472,810 1,754,288
Cost of sales (1,421,268) (1,686,944)
Depreciation of fixed assets (1,410) (1,981)
Selling and administrative expenses (25,318) (39,403)
---------- ----------
Operating income 24,814 25,960
Financial income/(expenses), net (1,737) 9,613
Other income 13,238 8,216
Reorganization expenses (3,029) -
---------- ----------
Income before income taxes 33,286 43,789
Income taxes (5,447) (6,564)
---------- ----------
Income before minority interests 27,839 37,225
Minority interests (13,582) (16,341)
---------- ----------
Net income 14,257 20,884
========== ==========
Pro forma earnings per share 1.19 1.74
========== ==========
</TABLE>
29
<PAGE> 99
CHINA RESOURCES DEVELOPMENT INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share and per share data)
18. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Period from
December 14,
1993 to Year ended
December 31, December 31,
1994 1995
RMB RMB
<S> <C> <C>
Cash paid during the period/year for:
Interest expenses 25,321 49,963
Income tax - 307
====== ======
Non-cash financing activity:
Series A preferred stock issued for
conversion of long term loans
from shareholders - 53,930
====== ======
</TABLE>
19. CONCENTRATION OF RISK
Concentration of credit risk:
Financial instruments that potentially subject the Group to significant
concentration of credit risk consist principally of cash deposits, trade
receivables and amounts due from the Farming Bureau and related companies.
(i) Cash deposits
The Group places its cash deposits with an international bank and
various PRC Stated-owned financial institutions.
(ii) Trade receivables
The Group sells to customers located throughout the PRC.
Concentration of credit risk with respect to trade receivables is
limited due to the large number of entities comprising the Group's
customer base. The Group carefully assesses the financial strength
of its customers and generally does not require collateral.
(iii) Amounts due from Farming Bureau and related companies
The Farming Bureau has guaranteed the recoverability of all the
amounts due from related companies, all of which are State-owned
entities owned and/or controlled by the Farming Bureau.
The Farming Bureau is a division of the Ministry of Agriculture of
the People's Republic of China.
30
<PAGE> 100
CHINA RESOURCES DEVELOPMENT INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share and per share data)
19. CONCENTRATION OF RISK (continued)
Current vulnerability due to certain concentrations:
The Group's operating assets and primary source of income and cash flow
are its interests in its subsidiaries in the PRC. The value of the
Group's interests in these subsidiaries may be adversely affected by
significant political, economic and social uncertainties in the PRC.
Although the PRC government has been pursuing economic reform policies for
the past 17 years, no assurance can be given that the PRC government will
continue to pursue such policies or that such policies may not be
significantly altered, especially in the event of a change in leadership,
social or political disruption or unforeseen circumstances affecting the
PRC's political, economic and social life. There is also no guarantee
that the PRC governement's pursuit of economic reforms will be consistent
or effective.
The Group is dependent on the Farming Bureau for providing substantially
all of the supply of natural rubber. While Hainan Agricultural, First
Supply and Second Supply have entered into an agreement with the Farming
Bureau which requires the Farming Bureau to prioritize allocation of
natural rubber in favor of First Supply and Second Supply (the "Operating
Subsidiaries"), there can be no assurances that this agreement will result
in continued allocations of satisfactory supplies of natural rubber.
Additionally, the Operating Subsidiaries are dependent upon the Farming
Bureau to purchase a significant portion of the materials and supplies
sold by the Operating Subsidiaries in their current procurement
operations. Although the Group and the Farming Bureau have entered into a
Long-Term Sale and Purchase Agreement dated November 5, 1994 (the "Sale
and Purchase Agreement"), which requires the Farming Bureau to purchase on
a priority basis from the Operating Subsidiaries the types of materials
and supplies currently procured for it, there can be no assuarances that
the Farming Bureau will actually purchase such materials or supplies or
that market terms will be sufficient to allow the Operating Subsidiaries
to sell any such materials or supplies to the Farming Bureau on terms
which are profitable to the Company. The Sale and Purchase Agreement has
a 15 year term; however, its enforceability in the PRC would be subject to
broad discretion and interpretive powers of the courts and equitable terms
which allow either party to terminate the agreement if the other
materially defaults. Damages for actual losses may be awarded to the
non-defaulting party.
Currently, a large proportion of the Group's revenue come from the sale
of natural rubber and the procurement of materials and supplies in the
PRC, which is vulnerable to the increase in the level of competition
from overseas suppliers of natural rubber and the change in the supply
and demand relationship with companies owned and/or controlled by the
Farming Bureau.
31
<PAGE> 101
CHINA RESOURCES DEVELOPMENT INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share and per share data)
20. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Group in
estimating its fair value disclosures for financial instruments:
(i) Cash and cash equivalents
The carrying amounts reported in the consolidated balance sheets
for cash and cash equivalents approximate their fair value.
(ii) Amounts due to/from the Farming Bureau, related companies and
shareholders
The carrying amounts are reasonable estimates of the fair values
due to the short maturity of these assets and liabilities.
(iii) Investments
Investments in PRC government bonds are stated at cost which
approximate their fair values.
It was not practicable to estimate the fair values of the Group's
investments in non-traded investments because of the lack of
quoted market prices and the inability to estimate fair values
without incurring excessive costs. The carrying amounts of
RMB12,022 and RMB11,963 at December 31, 1994 and 1995,
respectively, represent the Group's best estimates of current
economic values of these investments.
(iv) Short-term bank loans
The carrying amounts of the Group's short-term bank loans
approximate their fair values due to their short maturity.
32
<PAGE> 102
CHINA RESOURCES DEVELOPMENT INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share and per share data)
21. RESERVES AND DISTRIBUTION OF PROFITS
In accordance with the relevant PRC regulations and the articles of
association of Hainan Agricultural (the "Articles of Association"),
appropriations representing 10% of the net income as reflected in its
statutory financial statements will be allocated to each of surplus
reserve and collective welfare fund.
Subject to certain restrictions set out in the relevant PRC regulations
and the Articles of Association, the surplus reserve may be distributed
to Billion Luck, the Farming Bureau and Guilinyang State Farm in the
form of share bonus issues. The Group's share of the amounts
transferred to the surplus reserve for the period from December 14, 1993
to December 31, 1994 and for the year ended December 31, 1995 were
RMB1,328 and RMB3,137, respectively.
In accordance with the relevant PRC regulations and the Articles of
Association, the collective welfare fund must be used for capital
expenditure on staff welfare facilities. Such facilities are for the
use of the staff and are owned by Hainan Agricultural. The Group's
share of the amounts transferred to the collective welfare fund for the
period from December 14, 1993 to December 31, 1994 and for the year
ended December 31, 1995 were RMB1,329 and RMB3,136, respectively.
According to relevant laws and regulations in the PRC, distributable
reserves of Hainan Agricultural and its subsidiaries are determined in
accordance with the relevant PRC accounting rules and regulations. The
retained earnings in these financial statements reflect the Company's
share of the effect of US GAAP adjustments to HARC and its subsidiaries'
financial statements and do not represent distributable reserves under
the PRC regulations. The amounts of retained earnings of Hainan
Agricultural and its subsidiaries that are included on the consolidated
balance sheets as of December 31, 1994 and 1995 that are available for
distribution are RMB10,626 and RMB27,844, respectively.
33
<PAGE> 103
CHINA RESOURCES DEVELOPMENT INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share and per share data)
22. COMMITMENTS AND CONTINGENCIES
(a) Lease commitments
On July 15, 1994, Hainan Agricultural entered into a rental
agreement for the leasing of a portion of a building located in
Haikou, Hainan, the PRC for a period of 10 years commencing on
October 1, 1994.
Future minimum payments under the operating leases at December 31,
1995 are as follows:
<TABLE>
<S> <C>
1996 170
1997 170
1998 170
1999 170
2000 170
Thereafter 640
-----
Total minimum lease payments 1,490
=====
</TABLE>
Rental expense under an operating lease for the period from
December 14, 1993 to December 31, 1994 and for the year ended
December 31, 1995 amounted to RMB43 and RMB170, respectively.
(b) Futures contracts
As of December 31, 1995, the Group had open short positions in
respect of its natural rubber commodity futures contracts,
maturing through 1996, with a notional value of RMB119,670.
(c) Investment
In August 1995, the Group entered into an agreement which required
the Group to contribute RMB1,747 (US$210) to purchase a 30% equity
interest in Hainan Far East Rubber Development Co. Ltd.
34
<PAGE> 104
CHINA RESOURCES DEVELOPMENT INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share and per share data)
23. FOREIGN CURRENCY EXCHANGE
The Renminbi ("RMB") is not freely convertible into foreign currencies.
Effective from January 1, 1994, a single rate of exchange is quoted
daily by the People's Bank of China (the "Unified Exchange Rate").
However, the unification of the exchange rates does not imply
convertibility of RMB into United States dollars ("US$") or other
foreign currencies. All foreign exchange transactions continue to take
place either through the Bank of China or other banks authorized to buy
and sell foreign currencies at the exchange rates quoted by the People's
Bank of China. Approval of foreign currency payments by the Bank of
China or other institutions requires submitting a payment application
form together with suppliers' invoices, shipping documents and signed
contracts.
The Unified Exchange Rate at December 31, 1994 and 1995 were US$1 :
RMB8.45 and US$1 : RMB8.32, respectively.
24. RETIREMENT BENEFITS
As stipulated by the PRC regulations, First Supply and Second Supply
participate in a defined contribution retirement plan administered by a
State-owned insurance company controlled by the Farming Bureau (the
"Retirement Plan"). All staff of First Supply and Second Supply are
covered under the Retirement Plan and are entitled to a pension upon
their retirement equal to a fixed proportion of their ending basic
salary amount as at their retirement. First Supply and Second Supply
are required to make contributions to the Retirement Plan at a rate of
21% of the aggregate of basic salaries, allowances and bonus of its
existing staff. Upon retirement, the retired staff are entitled to a
monthly pension payment borne by the above-mentioned insurance company
under the Retirement Plan.
The amounts of contributions paid by First Supply and Second Supply,
which were charged to the consolidated statements of income, amounted to
RMB975 for the period from December 13, 1993 to December 31, 1994 and
RMB1,591 for the year ended December 31, 1995.
35
<PAGE> 105
CHINA RESOURCES DEVELOPMENT INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share and per share data)
25. SEGMENT FINANCIAL INFORMATION
The Group is principally engaged in the distribution of natural rubber
and the procurement of materials and supplies in the PRC.
The Group did not engage in any export sales during the year ended
December 31, 1995 and the period from December 13, 1993 to December 31,
1994.
Business segment
Reportable information on the Group's segments are as follows:
<TABLE>
<CAPTION>
Period from
December 14,
1993to Year ended
December 31, December 31,
1994 1995
RMB RMB
<S> <C> <C>
Sales
Distribution of natural rubber:
Sales to unaffiliated customers 1,199,691 1,776,641
Sales to affiliates 27,366 1,630
--------- ---------
1,227,057 1,778,271
--------- ---------
Procurement of materials and supplies:
Sales to unaffiliated customers 48,190 72,880
Sales to affiliates 33,001 106,092
--------- ---------
81,191 178,972
--------- ---------
Total sales 1,308,248 1,957,243
========= =========
</TABLE>
36
<PAGE> 106
CHINA RESOURCES DEVELOPMENT INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share and per share data)
25. SEGMENT FINANCIAL INFORMATION (continued)
Business segment (continued)
<TABLE>
<CAPTION>
Period from
December 14,
1993 to Year ended
December 31, December 31,
1994 1995
RMB RMB
<S> <C> <C>
Operating income:
Distribution of natural rubber 17,538 47,188
Procurement of materials and supplies 1,645 1,607
------ ------
Total operating income 19,183 48,795
====== ======
Depreciation:
Distribution of natural rubber 841 2,562
Procurement of materials and supplies 288 258
------ ------
Total depreciation expenses 1,129 2,820
====== ======
Capital expenditures:
Distribution of natural rubber - -
Procurement of materials and supplies 7,179 4,275
------ ------
Total capital expenditures 7,179 4,275
====== ======
December 31,
1994 1995
RMB RMB
Identifiable assets:
Distribution of natural rubber 223,203 435,664
Procurement of materials and supplies 308,998 231,748
------- -------
Total identifiable assets 532,201 667,412
Goodwill 1,104 1,076
------- -------
Total assets 533,305 668,488
======= =======
</TABLE>
26. COMPARATIVE AMOUNTS
Certain comparative amounts have been reclassified to conform with the
current year presentation.
37
<PAGE> 107
CHINA RESOURCES DEVELOPMENT INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands except share and per share data)
<TABLE>
<CAPTION>
Period from
December 14,
1993 to Year ended
December 31, December 31,
1994 1995 1995
Note RMB RMB US$
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income 10,282 19,175 2,305
Adjustments to reconcile net income to net cash
used in operating activities:
Minority interests 10,389 18,153 2,182
Depreciation and amortization 1,129 2,848 342
Reorganization expenses 926 - -
Gain on disposal of fixed assets - (1,326) (159)
Decrease/(increase) in assets:
Trade receivables (7,297) (9,995) (1,201)
Other receivables, deposits and prepayments (22,438) (8,249) (992)
Inventories (24,902) (12,025) (1,445)
Amount due from Farming Bureau - (80,427) (9,667)
Amounts due from related companies 76,054 (23,793) (2,860)
Other current assets - (5,054) (608)
Increase/(decrease) in liabilities:
Amounts due to related companies (47,026) (813) (98)
Accounts payable (35,147) (2,364) (284)
Income taxes payable 3,663 6,602 794
Other payables and accrued liabilities 6,596 (6,647) (799)
Amount due to Farming Bureau 24,295 (14,978) (1,800)
-------- ------- -------
Net cash used in operating activities (3,476) 118,893) (14,290)
-------- ------- -------
CASH FLOWS PROVIDED BY/(USED IN) INVESTING
ACTIVITIES
Purchases of fixed assets (1,930) (4,275) (514)
Additions to construction in progress (5,249) - -
Purchases of investments (10,003) - -
Acquisition of subsidiaries 17 (1,104) - -
Proceeds from sale of construction in progress - 19,299 2,320
Proceeds from sale of fixed assets 91 1,935 233
Proceeds from the sale of investments 108 59 7
Loans to related companies (21,072) (2,533)
------- ------- -------
Net cash used in investing activities (18,087) (4,054) (487)
------- ------- -------
</TABLE>
6
<PAGE> 108
CHINA RESOURCES DEVELOPMENT INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands except share and per share data)
<TABLE>
<S> <C> <C> <C> <C>
CASH FLOWS PROVIDED BY/(USED IN) FINANCING ACTIVITIES
Issue of share capital less share
offering costs 860 9,831 1,182
Loans from shareholders 63,850 5,807 698
Cash injected by minority interests 17 48,458 - -
Proceeds from bank borrowings 8,000 175,000 21,034
Repayments of bank borrowings (46,980) (170,323) (20,472)
Cash remitted to Farming Bureau (16,966) - -
Short term advances - 86,917 10,446
Loans from related companies - 3,500 421
Loans to related companies (23,684) - -
Cash from repayment of loans by related companies 57,182 - -
------- -------- -------
Net cash provided by financing activities 90,720 110,732 13,309
------- -------- -------
NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS 69,157 (12,215) (1,468)
Cash and cash equivalents, at beginning of period/year - 69,157 8,312
------- -------- --------
Cash and cash equivalents, at end of period/year 69,157 56,942 6,844
======= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
7
<PAGE> 109
CHINA RESOURCES DEVELOPMENT INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands except share and per share data)
<TABLE>
<CAPTION>
Period from
December 14,
1993 to Year ended
December 31, December 31,
1994 1995 1995
Notes RMB RMB US$
<S> <C> <C> <C> <C>
NET SALES 1,308,248 1,957,243 235,246
COST OF SALES (1,263,309) 1,851,186) (222,498)
---------- --------- --------
GROSS PROFIT 44,939 106,057 12,748
DEPRECIATION OF FIXED ASSETS (1,129) (2,820) (339)
SELLING AND ADMINISTRATIVE
EXPENSES (24,627) (54,442) (6,544)
-------- --------- --------
OPERATING INCOME 19,183 48,795 5,865
FINANCIAL INCOME/(EXPENSES), NET 4 2,568 (33,212) (3,992)
OTHER INCOME 5 5,612 28,654 3,444
REORGANIZATION EXPENSES 6 (3,029) - -
-------- --------- --------
INCOME BEFORE INCOME TAXES 24,334 44,237 5,317
INCOME TAXES 7 (3,663) (6,909) (830)
-------- --------- --------
INCOME BEFORE MINORITY INTERESTS 20,671 37,328 4,487
MINORITY INTERESTS (10,389) (18,153) (2,182)
-------- --------- --------
NET INCOME 10,282 19,175 2,305
======== ======== ========
EARNINGS PER SHARE 3(j) 0.86 1.56 0.187
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE> 110
CHINA RESOURCES DEVELOPMENT INC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Amounts in thousands except share
and per share data) December 31,
1994 1995 1995
Notes RMB RMB US$
<S> <C> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS'
EQUITY
CURRENT LIABILITIES
Bank loans 11 288,323 293,000 35,216
Amount due to Farming Bureau 16 14,978 - -
Amounts due to related companies 16 19,967 22,654 2,723
Amounts due to shareholders 16 9,775 15,727 1,890
Accounts payable 42,240 39,876 4,793
Income taxes payable 3,663 10,265 1,234
Other payables and
accrued liabilities 32,580 21,533 2,588
Short term advances 12 - 86,917 10,447
------- ------- ------
TOTAL CURRENT LIABILITIES 411,526 489,972 58,891
LONG TERM LOANS FROM SHAREHOLDERS 13 54,075 - -
MINORITY INTERESTS 55,914 74,067 8,902
------- ------- ------
TOTAL LIABILITIES 521,515 564,039 67,793
------- ------- ------
COMMITMENTS AND CONTINGENCIES 22
SHAREHOLDERS' EQUITY
Common stock, US$0.001 par value:
Authorized - 200,000,000 shares in
1995 and 1994
Issued and outstanding - 12,000,000
shares in 1995 and 1994 14 101 101 12
Preferred stock, authorized -
10,000,000 shares in 1995 and nil in 1994:
Series A preferred stock, US$1 par value:
Authorized, issued and outstanding - 6,400,000
shares in 1995 and nil in 1994 14 - 53,930 6,482
Series B convertible preferred stock, US$0.001
par value:
Authorized - 2,500 shares in 1995 and nil in 1994
Issued and outstanding - 370 shares in 1995 and
nil in 1994 14 - - -
Additional paid-in capital 14 1,407 20,961 2,519
Reserves 21 2,657 8,930 1,074
Retained earnings 7,625 20,527 2,467
------- ------- ------
TOTAL SHAREHOLDERS' EQUITY 11,790 104,449 12,554
------- ------- ------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY 533,305 668,488 80,347
======= ======= ======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE> 111
APPENDIX
PROXY FOR ANNUAL MEETING
OF SHAREHOLDERS
DECEMBER 30, 1995
THIS PROXY IS SOLICITED ON
BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Li Shunxing and Yang Jiangang
or either of them acting singly in the absence of the other, as attorneys and
as proxies, with full power of substitution, to vote all shares of Common Stock
of China Resources Development, Inc. (the "Company") which the undersigned is
entitled to vote at the Annual Meeting of Shareholders of the Company to be
held on December 30, 1996, at 3:00 p.m., local time, at the offices of Worlder
International Company Limited located at 21st Floor, Great Eagle Centre, No. 23
Harbour Road, Hong Kong, and at any adjournments or postponements thereof, upon
the matters described in the accompanying Proxy Statement and upon other
business that may properly come before the meeting. Said proxy is directed to
vote as instructed on the matters set forth below and otherwise at his
discretion. Receipt of a copy of the Notice of said meeting and Proxy
Statement is hereby acknowledged.
1. PROPOSAL TO EFFECT A ONE-FOR-TEN REVERSE STOCK SPLIT of
the Company's common stock, par value $0.001 per share. (The Board of Directors
recommends a vote FOR)
[ ] FOR [ ] AGAINST [ ] ABSTAIN
2. PROPOSAL TO AMEND THE ARTICLES OF INCORPORATION, as
revised, of the Company to increase the share ownership requirement for the
calling of special meetings of the shareholders. (The Board of Directors
recommends a vote FOR)
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. PROPOSAL TO AMEND THE ARTICLES OF INCORPORATION, as
revised, of the Company to establish three classes of directors and clarify
provisions affecting officers and directors. (The Board of Directors recommends
a vote FOR)
[ ] FOR [ ] AGAINST [ ] ABSTAIN
4. PROPOSAL TO AMEND THE BY-LAWS OF THE COMPANY to allow the
Board of Directors to amend the By-Laws. (The Board of Directors recommends a
vote FOR)
[ ] FOR [ ] AGAINST [ ] ABSTAIN
<PAGE> 112
5. PROPOSAL TO AMEND THE COMPANY'S 1995 STOCK OPTION PLAN to
increase the number of shares of Common Stock subject thereto and to decrease
the required holding period for non-qualified stock options. (The Board of
Directors recommends a vote FOR)
[ ] FOR [ ] AGAINST [ ] ABSTAIN
6. ELECTION OF NOMINEES FOR DIRECTORS in the following classes.
SHAREHOLDERS MAY WITHHOLD THEIR VOTE FOR ANY NOMINEES BY STRIKING OUT THE NAME
OF SUCH NOMINEE OR NOMINEES:
CLASS I: Yiu Yat Hung, Tam Cheuk Ho
CLASS II: Wang Faren, Han Jian Zhun
CLASS III: Yang Jiangang, Li Shunxing, Zhang Yibing
[ ] FOR [ ] WITHHOLD AUTHORITY
all nominees listed to vote for all nominees listed
(except as marked)
7. PROPOSAL TO RATIFY THE SELECTION of Ernst & Young,
Certified Public Accountants, as the Company's independent accountants for the
fiscal year ending December 31, 1996. (The Board of Directors recommends a vote
FOR)
[ ] FOR [ ] AGAINST [ ] ABSTAIN
8. To transact such other business as may properly come
before the meeting and any adjournment or postponement thereof.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
Name of Owner: _____________________________
(Please type or print)
Signature: ________________________________
Title or Capacity: ________________________
(if applicable) (Please type or print)
Date: ________________________________
Name of Owner: _____________________________
(Please type or print)
Signature: ________________________________
Title or Capacity: ________________________
(if applicable) (Please type or print)
Date: ________________________________
<PAGE> 113
This Proxy when properly executed will be voted in the manner directed herein
by the undersigned stockholder. If no direction is made, this proxy will be
voted FOR proposals 1 through 8. If signing as attorney, executor, trustee or
guardian, please give your full title as such. If stock is held jointly, each
owner should sign.
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY
USING THE ENCLOSED ENVELOPE
