<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(AMENDMENT NO. 1)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED,
EFFECTIVE OCTOBER 7, 1996]
For the fiscal year ended December 31, 1996
CHINA RESOURCES DEVELOPMENT, INC.
(Exact name of Registrant as specified in its Charter)
<TABLE>
<S> <C> <C>
Nevada 33-5628-NY 87-02623643
------ ---------- -----------
(State or other jurisdiction (Commission File No.) (IRS Employer
of incorporation) Identification No.)
</TABLE>
23/F Office Tower, Convention Plaza
1 Harbour Road, Wanchai, Hong Kong
Telephone: 011-852-2810-7205
(Address and telephone number of principal executive offices)
Securities registered under Section 12(b) of the Exchange Act: 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.): $13,423,387 as of April 10, 1997.
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. 5,779,004 shares
of Common Stock, $.001 par value (as of April 14, 1997).
DOCUMENTS INCORPORATED BY REFERENCE: Definitive Proxy Statement for
1996 Annual Meeting of Shareholders (Schedule 14A) is incorporated by reference
in Part I, Item 4, hereof.
Page 1 of 166 pages Exhibit Index on Page 90
<PAGE> 2
CONVENTIONS
Unless otherwise specified, all references in this report to "U.S.
Dollars," "Dollars," "US$," 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, 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.
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, 1996, which was US$1.00 = HK$7.74. 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.
-2-
<PAGE> 3
References to "HARC" are to Hainan Zhongwei Agricultural Resources
Company Limited (formerly known as 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 "Restructuring Agreements" are to the Shareholders'
Agreement on Business Restructuring among Billion Luck, the Farming Bureau and
Guilinyang Farm, and the Assets and Staff Transfer Agreement among HARC, First
Supply, Second Supply and the Farming Bureau, both of which were effective as
of October 1, 1996.
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, of which no shares are outstanding.
References to "Series B Convertible Preferred Stock" are to the
Company's formerly designated series B convertible preferred stock, $.001 par
value, of which no shares are outstanding and which is no longer so designated.
References to "Series B Preferred Stock" are to the Company's Series B
Preferred Stock, $.001 par value, of which 3,200,000 shares are outstanding.
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.
FORWARD-LOOKING STATEMENTS
This report contains statements that constitute forward-looking
statements. Those statements appear in a number of places in this report and
include, without limitation, statements regarding the intent, belief and
current expectations of the Company, its directors or its officers with respect
to (i) the effect of the restructuring of HARC and the Operating Subsidiaries;
(ii) the Company's ability to hedge against the risks associated with natural
rubber prices by trading in natural rubber commodities futures; (iii) the
Company's policies regarding investments, dispositions, financings, conflicts
of interest and other matters; and (iv) trends affecting the Company's
financial condition or results of operations. Any such forward-looking
statement is not a guarantee of future performance
-3-
<PAGE> 4
and involves risks and uncertainties, and actual results may differ materially
from those in the forward-looking statement as a result of various factors.
The accompanying information contained in this report, including without
limitation the information set forth above and the information set forth under
the heading, "Management's Discussion and Analysis of Results of Operations and
Financial Condition," 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 belief will result or be achieved or accomplished.
-4-
<PAGE> 5
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. Pursuant to an approval
document dated March 16, 1997, issued by the Hainan Provincial Securities
Management Office, the name of HARC was approved to be changed from "Hainan
Agricultural Resources Company Limited" to "Hainan Zhongwei Agricultural
Resources Company Limited." A new business license, valid until June 28, 2000,
dated March 26, 1997, effecting the new name was obtained from the Hainan
Provincial Industrial and Commercial Administration Bureau.
HARC is a Chinese company incorporated on June 28, 1994, with a
registered capital of Rmb100 million (US$12.05 million). Billion Luck made a
cash contribution of Rmb56 million (US$6.75 million) 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$0.60 million) 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$4.70 million) (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 HARC and 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
1995, according to data published in China Statistical Yearbook 1996 and
Statistical Yearbook of Hainan 1996, Hainan Province accounted for
approximately 61% of the domestic production of natural rubber in the PRC, of
which approximately 78% of that 61% is from the Hainan State Farms and
approximately 22% is from non-state farms. Accordingly, the Hainan State Farms
control 48% 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 HARC and
the Operating Subsidiaries, enters into natural rubber commodities futures
contracts to hedge the risk. As opportunities arise, HARC and 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. In 1996, HARC and the Operating
Subsidiaries have diversified into trading of other agricultural products, like
coffee beans. First Supply and Second Supply were originally established as
state-owned enterprises in the PRC by the Farming Bureau.
-5-
<PAGE> 6
The following chart illustrates the equity ownership by percentage of
each of the Company's subsidiaries as of December 31, 1996:
<TABLE>
<S> <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
-------------------------------------------------------- the PRC Ministry
of Agriculture
HAINAN ZHONGWEI AGRICULTURAL
RESOURCES COMPANY LIMITED,
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 eight trading
and servicing divisions. During the fourth quarter of 1996, HARC undertook a
restructuring plan in order to rationalize and streamline its business
operations and assets. The terms of the restructuring are set forth in a
Shareholders' Agreement on Business Restructuring among the Farming Bureau,
Guilinyang Farm and Billion Luck, and an Assets and Staff Transfer Agreement
among the Farming Bureau, HARC, First Supply and Second Supply, both of which
were effective on October 1, 1996, and are included as exhibits hereto and
incorporated herein by reference.
The purpose of the restructuring plan is to control management
overhead and improve efficiency in order to enhance long-term benefits to the
Company. The plan should result in the reduction of duplicative business
divisions and associated management overhead, the elimination of excessive
labor headcounts and redundant positions, the restructuring of HARC's asset
base and the sale of non-core assets to improve liquidity ratios. The various
former trading and servicing divisions of the Operating Subsidiaries have now
been reduced to only a few principal trading and servicing divisions. Cash
management and policy making will become more centralized, ensuring that
capital resources can be allocated to trading divisions more efficiently and
effectively. A simplified management structure should also enhance the
efficiency of HARC's management reporting system. The Company's management
believes that HARC's selling and administrative expenses will be substantially
reduced following the full implementation of the restructuring. Savings
resulting from reduced administrative expenses, staff costs and related costs,
as well as proceeds from the sale of non-core assets, will improve the
Company's liquidity and allow it to pursue additional investment opportunities.
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
-6-
<PAGE> 7
may be made by HARC's shareholders during a general meeting of the
shareholders) and, as of December 31, 1996, 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, 1996, 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.
The following chart illustrates the organizational and management
structure of HARC:
<TABLE>
<S> <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(3)
-------------------- -------------------- --------------------
</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.
(3) The businesses in which the HARC headquarters engages include:
Investment Holding, Trading of Agricultural Products and Futures
Trading.
ACTIVITIES OF HARC AND THE 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. HARC and 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
-7-
<PAGE> 8
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 (usually the
first quarter of each year).
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
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,
------------------------------------------------------------------------------------------------------------
1994 1995 1996 1996
---- ---- ---- ----
(Rmb) (Rmb) (Rmb) (US$)
(Unaudited (Audited (Audited (Audited
Pro Forma) Historical) Historical) Historical)
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Sales to unaffiliated customers
(net of sales tax)
Distribution of natural rubber 1,551,452 1,776,641 1,519,060 183,019
Procurement of materials &
supplies and distribution of
other agricultural products 98,246 72,880 102,745 12,379
--------- --------- --------- --------
1,649,698 1,849,521 1,621,805 195,398
Sales to affiliated customers
(net of sales tax)
Distribution of natural rubber 28,575 1,630 -0- -0-
Procurement of materials &
supplies and distribution of
other agricultural products 76,015 106,092 205,694 24,782
------- ------- ------- ------
104,590 107,722 205,694 24,782
</TABLE>
-8-
<PAGE> 9
<TABLE>
<S> <C> <C> <C> <C>
Operating income
Distribution of natural rubber 19,766 47,188 40,460 4,875
Procurement of materials &
supplies and distribution of
other agricultural products 6,194 1,607 57,682 6,950
------ ------ ------- ------
25,960 48,795 98,142 11,825
Identifiable assets
Distribution of natural rubber 223,203 435,664 552,606 66,579
Procurement of materials &
supplies and distribution of
other agricultural products 308,998 231,748 151,458 18,248
------- ------- ------- ------
532,201 667,412 704,064 84,827
</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 production base in China. Hainan
State Farms' natural rubber output was approximately 200,000 tons and 182,000
tons in 1995 and 1996, respectively (a sales value of approximately Rmb2.6
billion (US$313 million) and Rmb2.4 billion (US$289 million) for 1995 and 1996,
respectively). According to the Farming Bureau's Ninth Five-Year Plan
(1995-2000), it is anticipated that the aggregate rubber output of the Hainan
State Farms for the years 1995 to 2000 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$361 million) at the 1996 average price level.
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$398 million) at the 1996 average price level.
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. In
1996, HARC and the Operating Subsidiaries diversified into trading of other
agricultural products like coffee beans.
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 Rmb43.76
million (US$5.27 million) in 1994, Rmb48.55 million (US$5.85 million) in 1995
and Rmb92.43 million (US$11.14 million) in 1996.
RUBBER DISTRIBUTION
The Company, through HARC and 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.
-9-
<PAGE> 10
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 1995 accounted for 94% of the world's natural
rubber output. According to China Statistical Yearbook 1996, China ranks 5th
in the world in terms of natural rubber output. China's output accounted for
6.10%, 6.70% and 7.43% of the world's natural rubber output in 1993, 1994 and
1995, 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 Statistical Yearbook of Hainan 1996.
World Output of Natural Rubber by Country in 1995
<TABLE>
<CAPTION>
Country or Region Tons
----------------- ----
(in thousands)
<S> <C>
Thailand 1,721
Indonesia 1,312
Malaysia 1,074
India 485
China 424
Philippines 178
Nigeria 105
Sri Lanka 105
Ivory Coast 97
Vietnam 84
Others 123
-----
TOTAL 5,708
=====
(Source: China Statistical Yearbook 1996)
</TABLE>
Since January 1, 1952, the Farming Bureau, which controls
approximately 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) in 1995,
according to the Statistical Yearbook of Hainan 1996.
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. The natural rubber output of
the Hainan State Farms in 1996 was approximately 182,000 tons. 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 in the
years 1995 to 2000 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 the 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).
The natural rubber market in 1996 was not as favorable as in 1995. In
1995, the unit price of Chinese domestic natural rubber reached a historical
high of approximately Rmb16,700 (US$2,012) per ton, with an average price for
that year of approximately Rmb13,800 (US$1,663) per ton. The high price was
caused by strong domestic demand for natural rubber and a high rubber price in
the international market. The rubber price in the international market varies
according to the demand by major rubber consuming countries (the largest being
the United States, followed by China and Japan) and the supply from the major
rubber producing countries (such as Thailand, Indonesia and Malaysia). In
1996, due to weakened rubber consumption, especially in Japan and Korea,
coupled with increased supply from certain major rubber producers in Asia, the
rubber price in the international market dropped significantly.
-10-
<PAGE> 11
Major Asian rubber exporting countries, such as Thailand and
Indonesia, have targeted China (the world's second largest consumer of rubber)
for the sale of their natural rubber. These exporting countries have offered
China many preferential policies to stimulate export sales of natural rubber,
including longer credit terms, sales discounts and delivery in advance of
payment. China imported approximately 550,000 tons of natural rubber in 1996,
compared to 320,000 tons in 1995, representing an increase of 72%. Most of
these imports were clustered in the fourth quarter of the 1996. This large
influx of natural rubber, coupled with the weak domestic rubber consuming
market in China, has caused the domestic rubber price in 1996 to drop from
approximately Rmb15,500 (US$1,867) per ton at the beginning of the year to
Rmb11,200 (US$1,349) per ton by the end of the year.
The Company's gross profit margin on the distribution of natural
rubber has not been seriously affected by the fluctuation of the domestic
rubber price because (i) the Company has entered into rubber futures contracts
to hedge against the risk of adverse price movement of natural rubber; (ii)
under the Long-Term Supply and Purchase Agreement between the Operating
Subsidiaries and the Farming Bureau, a minimum gross profit on distribution of
natural rubber of 3.5% was guaranteed by the Farming Bureau; and (iii) purchase
discounts were received from the farms in return for the payment of a rubber
purchase deposit. The Company also maintains a team of experts to monitor the
rubber futures market in China. As opportunities arise, HARC and the Operating
Subsidiaries also enter into natural rubber futures contracts that are not
specific hedges, in anticipation of a rise or fall in the price of natural
rubber.
SUPPLIERS
HARC and the Operating Subsidiaries purchase natural rubber from the
92 farms comprising the Hainan State Farms, with the value of purchases
totalling approximately Rmb1,532 million (US$185 million) in 1994, Rmb1,653
million (US$199 million) in 1995 and Rmb1,438 million (US$173 million) in 1996.
The single largest supplier within the Hainan State Farms accounted for
approximately 3% (Rmb49 million, US$5.9 million) of such purchases in 1994, 3%
(Rmb57 million, US$6.9 million) in 1995 and 3% (RMB44.4 million, US$5.3
million) in 1996. No single farm accounted for more than 5% of the total
purchases of natural rubber in any of the years 1994, 1995 or 1996, but all
supplier farms are controlled under PRC law by the Farming Bureau. The top
five supplier farms accounted for approximately 14% (Rmb218 million, US$26.3
million) of such purchases in 1994, 13% (Rmb223 million, US$26.9 million) in
1995 and 12% (Rmb168 million, US$20.2 million) in 1996. 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, HARC and 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 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 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 1995, they accounted for
approximately 48% 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.
-11-
<PAGE> 12
HARC and the Operating Subsidiaries maintain a strong sales and
marketing force consisting of 28 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 HARC
and 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 natural rubber for 1994, 1995 and 1996 were Rmb1,580 million
(US$190 million), Rmb1,778 million (US$214 million) and RMB1,519 million
(US$183 million), respectively. The five largest customers for rubber, in the
aggregate, accounted for approximately 9%, 19% and 27% of the total revenue
derived from rubber sales for 1994, 1995 and 1996, respectively. The single
largest customer accounted for approximately 4%, 7% and 11% of such revenue for
1994, 1995 and 1996, respectively.
For the year ended December 31, 1996, HARC and the Operating
Subsidiaries had a total of approximately 490 customers for natural rubber and
natural rubber products with only one customer accounting for more than 5% of
total sales of such products. This customer was Shanghai Tire Group Company,
which accounted for 11% of total sales of natural rubber in 1996. No other
single customer accounted for more than 5% of total sales of natural rubber in
1996. Total sales for the year ended December 31, 1996, were Rmb1,519 million
(US$183 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 March. 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
80%, 71% and 61% of the total sales for 1994, 1995 and 1996, 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 239
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 no more than one month may be granted
to certain customers based on their credit and payment history with the
Operating Subsidiaries.
-12-
<PAGE> 13
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
obtained short term bank loans, which were generally secured by guarantees of
the Farming Bureau, to provide such financing. When a rubber purchase was made
by an Operating Subsidiary from a farm which had an outstanding balance in favor
of HARC or the Operating Subsidiary from a prior financing advance, it was
customary practice to credit the purchase price of the rubber against the
balance on the financing account 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 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 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.)
Pursuant to the Shareholders' Agreement on Business Restructuring and
the Assets and Staff Transfer Agreement, both effective as of October 1, 1996
(the "Restructuring Agreements"), HARC and the Operating Subsidiaries agreed to
assign to the Farming Bureau the amounts due from the farms and the affiliates
of the Farming Bureau as of September 30, 1996, and the Farming Bureau agreed
to assume the obligations under the short term bank loans, as part of the
corporate restructuring plan. The assignment of amounts due from farms and
affiliates of the Farming Bureau was effective on October 1, 1996, and the
assumption of short term bank loans will be effective upon approval of such
banks, but no later than March 31, 1997. Under the Restructuring Agreements,
the Farming Bureau had to obtain the banks' approval of the assumptions. As of
September 30, 1996, the aggregate amount due from the farms and affiliates of
the Farming Bureau amounted to approximately Rmb274 million (US$33 million), and
the short term bank loans amounted to approximately Rmb293 million (US$35
million). According to the Restructuring Agreements, the Farming Bureau will be
responsible for the payment of interest incurred on the bank loans after
September 30, 1996.
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.
China Output of Natural Rubber by Region in 1995
<TABLE>
<CAPTION>
Region Tons
------ ----
<S> <C>
Hainan 260,384
Yunnan 130,844
Guangdong 29,754
Guangxi 2,672
Fujian 371
--------
TOTAL 424,025
========
(Source: China Statistical Yearbook 1996)
</TABLE>
According to the China Statistical Yearbook 1996, the rubber output
from Hainan Province was 260,384 tons in 1995. According to the Statistical
Yearbook of Hainan 1996, the rubber output from the Hainan State Farms was
202,488 tons in 1995. Consequently, the rubber output from non-state owned
enterprises in Hainan Province accounted for approximately 57,896 tons,
representing 22% of the total natural rubber output of Hainan Province in 1995.
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 is limited and no new domestic rubber production 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
-13-
<PAGE> 14
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 1996 and statistics provided by the International Natural Rubber
Organization, in 1995 the domestic rubber output of the PRC and the rubber
consumption of the PRC were 424,000 tons and 744,000 tons, respectively.
Accordingly, the rubber output of the Farming Bureau in 1995 accounted for
approximately 48% 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 AND DISTRIBUTION OF OTHER
AGRICULTURAL PRODUCTS
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. These sourcing and procurement activities were conducted
primarily for the Hainan State Farms. The percentage of such sales to
non-affiliates, which has become significant in recent years, was 56% in 1994,
41% in 1995 and 33% in 1996. The decrease of such sales to non-affiliates in
1995 and 1996 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. In 1996, HARC and the Operating Subsidiaries also expanded
into trading of other agricultural products like coffee beans.
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.
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
-14-
<PAGE> 15
During 1996, HARC and the Operating Subsidiaries purchased production
materials and other agricultural products from a total of approximately 408
suppliers. The value of the total purchases of production materials and other
agricultural products was approximately Rmb130 million (US$15.7 million) in
1994, Rmb135 million (US$16.3 million) in 1995 and Rmb251 million (US$30.2
million) in 1996. The single largest supplier accounted for approximately 13%
(Rmb17 million, US$2.0 million) of such purchases in 1994, and 11% (Rmb15
million, US$1.8 million) in 1995 and 16% (Rmb39 million, US$4.7 million) in
1996. The two largest suppliers accounted for 13% and 8% of such purchases,
respectively, in 1994, the three largest suppliers accounted for 11%, 7% and 6%,
respectively, of such purchases in 1995 and the four largest suppliers accounted
for 16%, 12%, 6% and 6%, respectively, of such purchases in 1996 (and no other
suppliers accounted for more than 5%). The top five suppliers accounted for
approximately 29% (Rmb38 million, US$4.6 million) of such purchases in 1994, 26%
(Rmb35 million, US$4.2 million) in 1995 and 44% (Rmb111 million, US$13.4
million) in 1996. 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, HARC and 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 94
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 HARC and the Operating Subsidiaries with
respect to production materials and commodities occur within the PRC. The
business operations of HARC and 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 and agricultural products by HARC and
the Operating Subsidiaries for the years 1994, 1995 and 1996 totalled
approximately Rmb174 million (US$21 million), Rmb179 million (US$22 million)
and Rmb308 million (US$37.1 million), respectively. The five largest customers
for production materials and other agricultural products accounted for
approximately 9%, 6% and 37% of the total revenue derived from sales of
production materials and agricultural products for 1994, 1995 and 1996,
respectively. The single largest customer accounted for less than 5% of such
revenue for each of 1994 and 1995. The two largest customers accounted for 12%
and 9%, respectively, of such revenue in 1996 (and no other customers accounted
for 5% or more). HARC and 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 44%, 59% and
67% of the total revenue derived from sales of production materials and
agricultural products for 1994, 1995 and 1996, respectively.
SEASONALITY
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 HARC and 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
-15-
<PAGE> 16
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.
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.
-16-
<PAGE> 17
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.
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
-17-
<PAGE> 18
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.
Also, on September 1, 1995, the Arbitration Law of the People's
Republic of China became effective, allowing arbitration commissions to be
established in major cities of the PRC and authorizing such commissions to
arbitrate foreign-related disputes if the subject arbitration agreement submits
such disputes to such commissions.
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 with administrative reviews and receiving
approvals, there can be no assurance that such approvals, when necessary or
advisable, will be forthcoming.
-18-
<PAGE> 19
[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.
Pursuant to the Restructuring Agreements, surplus office facilities consisting
of a total gross area of approximately 12,000 square meters were transferred to
the Farming Bureau. The sales and administrative offices of the Operating
Subsidiaries were relocated to the headquarters of HARC. 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 (US$20,511) 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
August 9, 1996, an additional rental agreement was entered into between HARC
and the Hainan Farming Bureau Testing Center, an affiliate of the Farming
Bureau, on the same building to expand the office space and to house the sales
and administrative functions of First Supply and Second Supply. The term of
the lease is for a period of eight years (through September 30, 2004), and it
covers an area of approximately 314 square meters at an annual rental rate of
Rmb72,000 (US$8,675).
[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, 1996.
[Item 4] SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS
On December 30, 1996, pursuant to proper notice, the Company held its
annual meeting of shareholders. Several matters were submitted to a vote of
the shareholders of the Company, and proxies were properly solicited from the
holders of shares of the Company's common stock on December 13, 1996, the
record date for the meeting established by the Company's Board of Directors. A
quorum of shares entitled to vote was present at the meeting or represented by
proxies, and the following matters were approved by the holders of a majority
of the outstanding shares of the Company:
1. 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 (56,923,534 votes for, 6,675 votes against);
2. 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 (56,929,534 votes for, 675 votes
against);
-19-
<PAGE> 20
3. 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 (56,925,534 votes for, 4,675 votes
against);
4. an amendment to the By-Laws of the Company to allow the Board of
Directors to amend the By-Laws (56,923,534 votes for, 6,675 votes
against);
5. 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
(56,925,534 votes for, 4,675 votes against);
6. the election of directors (56,929,534 votes for all nominees, 675
votes to withhold authority to vote for all nominees, and no
individual votes to withhold authority to vote for any particular
nominee); and
7. the ratification of the appointment of Ernst & Young as the
Company's independent accountants for the fiscal year ending December
31, 1996 (56,929,534 votes for, 675 votes against).
The proxy materials sent to the shareholders of the company, which
include the notice to shareholders and the full text of each of the above
proposals as proposed and adopted, the Certificate of Amendment of Articles of
Incorporation of the Company, the Amended and Restated By-laws of the Company
and the Company's Amended and Restated 1995 Stock Option Plan are attached
hereto as Exhibits 99.4, 4.2, 3.7 and 10.34, respectively, and are incorporated
herein by reference.
[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 Stock as
reported by The Nasdaq Stock Market for each fiscal quarter of 1996, for that
period during the fiscal quarter ended September 30, 1995, during which high
and low bid quotations were reported and for the fiscal quarter 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, and the quotations have
been adjusted to give retroactive effect to the one-for-ten reverse stock split
that was effective as of December 31, 1996:
<TABLE>
<CAPTION>
Period High Bid Low Bid
------- -------- -------
<S> <C> <C>
1996 Fiscal Year, quarter ended:
March 31, 1996 . . . . . . . . . $62.50 $18.75
June 30, 1996 . . . . . . . . . 19.69 3.75
September 30, 1996 . . . . . . . 5.94 3.44
December 31, 1996 . . . . . . . 4.69 2.50
1995 Fiscal Year, quarter ended:
September 30, 1995 . . . . . . . $55.00 $35.00
December 31, 1995 . . . . . . . 68.75 50.00
</TABLE>
On April 14, 1997, there were 186 holders of record of the Company's Common
Stock.
The one-for-ten reverse stock split approved by the shareholders of
the Company was made effective by the Company's Board of Directors on December
31, 1996. In addition, on December 31, 1996, the Board of Directors approved
the exchange of 32 million pre-reverse shares of Common Stock, with substantial
restrictions, held by Everbright Finance & Investment Company Limited, for 3.2
million shares of the Company's Series B Preferred Stock, with nearly identical
restrictions. The terms of this exchange are set forth in the Exchange
Agreement between the Company and Everbright Finance & Investment Company
Limited, dated December 31, 1996, a copy of which is attached
-20-
<PAGE> 21
as Exhibit 10.33 and incorporated herein by reference. The Series B Preferred
Stock is not entitled to participate in dividend distributions or distributions
in the event of liquidation of the Company. See the Certificate of Amendment of
Certificate of Designation of Series B Convertible Preferred Stock, a copy of
which is attached hereto as Exhibit 4.2 and incorporated herein by reference.
The Company's two offshore private placements of common stock are fully
disclosed in its Current Reports on Form 8-K, dated March 8 and July 8, 1996,
which are incorporated herein by reference.
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.
-21-
<PAGE> 22
[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 three fiscal years ended December 31, 1994, 1995 and 1996, are
derived from the consolidated financial statements included elsewhere herein.
The selected pro forma financial data in the table for the Company's fiscal
years ended December 31, 1993 and 1994, are derived from the unaudited pro
forma consolidated financial information included elsewhere herein. 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,
1993 1994 1994 1995 1996 1996
(Rmb) (Rmb) (Rmb) (Rmb) (Rmb) (U.S. $)
(Unaudited (Unaudited (Audited (Audited (Audited (Audited
Pro forma) Pro forma) Historical) Historical) Historical) Historical)
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Sales 1,479,201 1,754,288 1,308,248 1,957,243 1,827,499 220,181
Sales tax (6,391) - - - - -
---------- ------------ ----------- ----------- ------------ ----------
Net sales 1,472,810 1,754,288 1,308,248 1,957,243 1,827,499 220,181
Cost of sales (1,421,268) (1,686,944) (1,263,309) (1,851,186) (1,677,056) (202,055)
---------- ----------- ---------- ----------- ----------- ----------
Gross Profit 51,542 67,344 44,939 106,057 150,443 18,126
Depreciation of fixed
assets (1,410) (1,981) (1,129) (2,820) (1,813) (218)
Selling and
administrative expenses (25,318) (39,403) (24,627) (54,442) (50,488) (6,083)
---------- ------------ ---------- ----------- ----------- ----------
Operating income 24,814 25,960 19,183 48,795 98,142 11,825
Financial income/
(expense), net (1,737) 9,613 2,568 (33,212) (19,870) (2,394)
Reorganization
expenses (3,029) - (3,029) - - -
Other income, net 13,238 8,216 5,612 28,654 6,054 729
---------- ----------- ---------- ----------- ----------- ----------
Income before income 33,286 43,789 24,334 44,237 84,326 10,160
taxes
Income taxes (5,447) (6,564) (3,663) (6,909) (13,991) (1,686)
-------- ----------- --------- ----------- ----------- ----------
Net income before
minority interests 27,839 37,225 20,671 37,328 70,335 8,474
Minority interests (13,582) (16,341) (10,389) (18,153) (34,513) (4,158)
---------- ----------- ---------- ----------- ----------- ----------
Net income after
minority interests 14,257 20,884 10,282 19,175 35,822 4,316
========== =========== ========== =========== =========== ==========
Earnings per share* 11.88 17.40 8.57 15.56 9.55 1.15
========== =========== ========== =========== =========== ==========
OTHER FINANCIAL DATA
Income before income
taxes, minority
interests, depreciation
and amortization 34,696 45,770 25,463 47,057 86,139 10,378
========== =========== ========== =========== =========== ==========
BALANCE SHEET DATA
Current assets 508,583 480,235 480,235 633,958 685,216 82,556
Working capital 2,227 65,808 68,709 143,986 301,474 36,322
Total assets 537,418 533,305 533,305 668,488 705,113 84,953
Current liabilities 506,356 414,427 411,526 489,972 383,742 46,234
Long-term liabilities - 54,075 54,075 - - -
Minority interests 13,667 51,609 55,914 74,067 108,580 13,082
Total liabilities and
minority interests 520,023 520,777 521,515 564,039 492,322 59,316
Shareholder's Equity 17,395 13,194 11,790 104,449 212,791 25,637
</TABLE>
-22-
<PAGE> 23
* The earnings per share information for the periods presented represents
primary earnings per share of the Company as if the reverse stock splits in
1994 and 1996 had been completed at the beginning of the periods. Fully
diluted earnings per share is not materially different from the primary
earnings per share of the periods presented.
[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.
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. In 1996, HARC and the
Operating Subsidiaries also diversified into trading of other agricultural
products like coffee beans.
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.
Pursuant to the Restructuring Agreements, HARC and the Operating
Subsidiaries agreed to assign to the Farming Bureau the amounts due from the
farms and the affiliates of the Farming Bureau as of September 30, 1996,
-23-
<PAGE> 24
and the Farming Bureau agreed to assume the obligations under the short term
bank loans, as part of the corporate restructuring plan. The assignment of
amounts due from farms and affiliates of the Farming Bureau was effective on
October 1, 1996, and the assumption of short term bank loans will be effective
upon approval of such banks, but no later than March 31, 1997. Under the
Restructuring Agreements, the Farming Bureau had to obtain the banks' approval
of the assumptions. As of September 30, 1996, the aggregate amount due from the
farms and affiliates of the Farming Bureau amounted to approximately Rmb274
million (US$33 million), and the short term bank loans amounted to approximately
Rmb293 million (US$35 million). According to the Restructuring Agreements, the
Farming Bureau will be responsible for the payment of interest incurred on the
bank loans after September 30, 1996. On March 28, 1997, and March 31, 1997, the
Operating Subsidiaries obtained approval from the relevant banks for the
assumptions of the bank loans by the Farming Bureau.
RESULTS OF OPERATIONS
The following table shows the selected audited consolidated income
statement data of the Company and its subsidiaries for the two fiscal years
ended December 31, 1995 and 1996, 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 included elsewhere therein.:
<TABLE>
<CAPTION>
(In thousands)
------------------------------------------------------------------------------------------------------
Year Ended December 31,
1993 1994 1995 1996
(Rmb) (Rmb) (Rmb) (Rmb)
------------------------------------------------------------------------------------------------------
(Unaudited (Unaudited (Audited (Audited
Pro forma) Pro forma) Historical) Historical)
<S> <C> <C> <C> <C>
Sales:
Distribution of natural rubber 1,021,584 1,580,027 1,778,271 1,519,060
Procurement of materials and supplies
and distribution of other
agricultural products 457,617 174,261 178,972 308,439
--------- --------- --------- ---------
1,479,201 1,754,288 1,957,243 1,827,499
========= ========= ========= =========
Gross profit (excluding sales tax) 57,933 67,344 106,057 150,443
Gross profit margin 3.9% 3.8% 5.4% 8.2%
Income before income taxes 33,286 43,789 44,237 84,326
Income taxes (5,447) (6,564) (6,909) (13,991)
---------- ---------- ---------- ---------
Net income before minority interests 27,839 37,225 37,328 70,335
Minority interests (13,582) (16,341) (18,153) (34,513)
--------- ---------- ---------- ---------
Net income after minority interests 14,257 20,884 19,175 35,822
========= ========= ========= =========
</TABLE>
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
SALES AND GROSS PROFIT
Total net sales for the year ended December 31, 1996, decreased
slightly by Rmb130 million or 6.6% to Rmb1,827 million, compared to Rmb1,957
million for the corresponding period in 1995. Net sales of natural rubber
declined by Rmb259 million or 14.6% to Rmb1,519 million, compared to Rmb1,778
million for the corresponding period in 1995. The decline in natural rubber
sales has been partially offset by the increase in procurement of materials and
supplies. Net sales revenue for the procurement of materials and supplies
increased significantly by Rmb129 million or 72% to Rmb308 million, compared to
Rmb179 million for the corresponding period in 1995.
As previously discussed, the natural rubber market in 1996 was not as
favorable as in 1995 because of a weakened domestic rubber consumption market
and a decline in the domestic natural rubber price caused by the
-24-
<PAGE> 25
large influx of imported natural rubber. The quantity of natural rubber sales
decreased by approximately 18,000 tons or 13% to 120,000 tons, compared to
138,000 tons for the corresponding period in 1995. The unit price of natural
rubber decreased from approximately Rmb15,500 per ton at the beginning of 1996
to approximately Rmb11,200 per ton by the end of 1996. During the third
quarter of the year, the Company deliberately stockpiled natural rubber in
anticipation of an upward price movement during the fourth quarter, when output
is generally lower. However, the domestic price of natural rubber continued to
be low during the fourth quarter because of the large influx of imported rubber
during the fourth quarter.
Following the completion of the Company's private offshore placements
on March 8 and July 8, 1996, portions of the net proceeds from the offerings
were invested into HARC and the Operating Subsidiaries as working capital to
expand the distribution operations. During the year, the Company has expanded
into trading of other agricultural products, such as coffee beans which were in
high demand in China as a result of the active trading of coffee commodity
futures in China. During the year, a quantity of approximately 8,500 tons of
coffee beans were sold and a net sales revenue of approximately Rmb241 million
was recorded, which carried an average gross profit of approximately 33%. The
corresponding sales revenue was recorded under the procurement of materials and
supplies. If sales of these agricultural products were excluded, net sales
revenue from procurement of materials and supplies would drop by approximately
Rmb112 million or 62% to Rmb67 million in 1996 from Rmb179 million in 1995. The
decline was mainly due to the prolonged enforcement of the macroeconomic
austerity measures implemented by the Central Government since mid-1993 to rein
in the overheated Chinese economy, which has hampered the domestic consumption
and demand for materials and supplies.
Gross profits increased by Rmb44 million or 42% to Rmb150 million in
1996 from Rmb106 million in 1995. The overall gross profit margin also
increased from 5.4% in 1995 to 8.2% in 1996. The increase was primarily
attributable to the high gross profit margin earned from the trading of
agricultural products. The gross profit margin on natural rubber distribution
was down to 4.2% in 1996 from 5.3% on 1995 due to competition from imported
natural rubber. The Company has mitigated the effect of adverse price movement
for domestic rubber on the gross profit margin by entering into rubber futures
contracts to hedge against the price risk associated with the holding of rubber
inventory, rubber purchase commitments and anticipation of rubber purchases.
The purchase discounts received from the farms, as well as the 3.5% gross
profit margin guarantee, also helped to shield the Company against the effect
of the drop in natural rubber prices on gross profit margins.
SELLING AND ADMINISTRATIVE EXPENSES
Selling and administrative expenses decreased by Rmb3.9 million or
7.2% to Rmb50.5 million in 1996 from Rmb54.4 million in 1995. Pursuant to the
Restructuring Agreements effective on October 1, 1996, the Company
strategically consolidated and rationalized its various trading divisions in
order to streamline its business operations and improve cost control. The
successful implementation of the corporate restructuring and cost control
measures has resulted in reduced administrative overhead, staff costs and
related expenses. This reduction of administrative overhead, staff costs and
related welfare expenses more than offset the increased legal and professional
fees associated with regulatory compliance and public relations costs incurred
as a result of the Nasdaq listing status of the Company.
FINANCIAL EXPENSES, NET
The net financial expenses decreased by Rmb13.3 or 40% to Rmb19.9
million in 1996 from Rmb33.2 million in 1995. The decrease in net financial
expenses was primarily attributable to the reduction in bank interest expenses
commencing in the fourth quarter of 1996 following the execution of the
Restructuring Agreements effective on October 1, 1996. According to the
Restructuring Agreements, all outstanding bank loans of the Operating
Subsidiaries were deemed assigned to the Farming Bureau, together with the
assignment of certain accounts receivable from the farms and certain affiliates
of the Farming Bureau. As a result, all bank interest incurred by the
Operating Subsidiaries commencing October 1, 1996, was borne by the Farming
Bureau.
OTHER INCOME, NET
Other income decreased by Rmb22.6 million or 79% to Rmb6.1 million in
1996 from Rmb28.7 million in 1995. This significant reduction in other income
was primarily due to the reduction in profit from the trading of commodity
futures contracts for non-hedging purposes. A profit on the trading of
commodity futures of Rmb10.6 million was recorded for the year 1995, compared
to a profit of only Rmb1.4 million for the year 1996. In addition, a service
fee of Rmb5 million was paid to the Farming Bureau in accordance with the
Agreement on Service and Cooperation entered into between the Farming Bureau
and HARC dated November 5, 1994. The agreement stipulates that the Farming
Bureau is entitled to a service fee up to a maximum of Rmb5 million, calculated
at a rate of 10% of HARC's annual net income before the service fee, as
determined in accordance with
-25-
<PAGE> 26
U.S. GAAP, provided that the annual net income of HARC exceeds Rmb40 million
after deducting such fee. No service fee was paid to the Farming Bureau in
1995 because the financial criteria for such payment was not met.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
For the following discussion and analysis, the results of operations for the
year ended December 31, 1995 are compared to the pro forma results of
operations for the 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.
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
-26-
<PAGE> 27
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
For the following discussion and analysis, the comparison of the results of
operations for the years ended December 31, 1993 and 1994 is on a pro forma
basis.
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 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.
-27-
<PAGE> 28
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 was derived from bank
deposits and 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 (Rmb3.5
million), (Rmb119 million) and Rmb130 million in fiscal 1994, 1995 and 1996,
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 in 1995 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. However, the domestic price of natural
rubber continued to be low during the first quarter of 1996 because of the
large influx of imported natural rubber and weakened domestic demand.
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,
1996, bearing a weighted average interest rate of 14.32% 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.
Pursuant to the Restructuring Agreements, HARC and the Operating
Subsidiaries agreed to assign to the Farming Bureau the amounts due from the
farms and the affiliates of the Farming Bureau as of September 30, 1996, and
the Farming Bureau agreed to assume the obligations under the short term bank
loans, as part of the corporate restructuring plan. The assignment of amounts
due from farms and affiliates of the Farming Bureau was effective on October 1,
1996, and the assumption of short term bank loans will be effective upon
approval of such banks, but no later than March 31, 1997. Under the
Restructuring Agreements, the Farming Bureau had to obtain the banks' approval
of the assumptions. As of September 30, 1996, the aggregate amount due from the
farms and affiliates of the Farming Bureau amounted to approximately
-28-
<PAGE> 29
Rmb274 million (US$33 million), and the short term bank loans amounted to
approximately Rmb293 million (US$35 million). According to the Restructuring
Agreements, the Farming Bureau will be responsible for the payment of interest
incurred on the bank loans after September 30, 1996. On March 28, 1997, and
March 31, 1997, the Operating Subsidiaries obtained approvals from the relevant
banks for the assumptions of the bank loans by the Farming Bureau.
During the year ended December 31, 1996, the Company issued 1,283
shares of Series B Convertible Preferred Stock, par value US$0.001 per share,
at a price of US$10,000 per share, resulting in gross proceeds of US$12.83
million. The terms of the Series B Convertible Preferred Stock, and other
information concerning the sale of such stock, were set forth in the Company's
two Forms 8-K dated March 8, 1996 and July 8, 1996, and are incorporated herein
by reference. As of December 31, 1996, all shares of the Series B Convertible
Preferred Stock were converted to shares of Common Stock, and no shares of
Series B Convertible Preferred Stock are currently authorized or outstanding.
(The currently outstanding shares of Series B Preferred Stock have rights,
preferences and limitations that are completely different from those of the
Series B Convertible Preferred Stock. See Exhibits 4.1 and 4.2 attached hereto
and incorporated herein by reference.)
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 three fiscal
years ended December 31, 1996, 1995 and 1994, and the unaudited pro forma
consolidated financial statements of the Company and its subsidiaries for the
year ended December 31, 1994, 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, 1996, 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 35 Chairman of the Board of Directors
Li Shunxing 46 Director and President
Wang Faren 49 Vice Chairman of the Board of Directors
Yiu Yat Hung 45 Vice Chairman of the Board of Directors
Han Jian Zhun 48 Director and Vice President
</TABLE>
-29-
<PAGE> 30
<TABLE>
<S> <C> <C>
Tam Cheuk Ho 34 Director and Chief Financial Officer
Zhang Yibing 30 Director and Secretary
Wong Wah On 33 Financial Controller
</TABLE>
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.
-30-
<PAGE> 31
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 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. In February, 1995, Mr. Zhang became a director of Everbright. 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 University and is a fellow 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.
As a result of the amendment to the Company's Articles of
Incorporation approved by the shareholders of the Company at the annual meeting
on December 30, 1996, the Company now has three classes of directors with
staggered three-year terms. Each director is elected to hold office until the
annual meeting of shareholders held three years after his election and until
his successor has been duly elected and qualified. In order to implement the
three separate classes and staggered terms for directors, at the annual meeting
on December 30, 1996, Messrs. Yiu Yat Hung and Tam Cheuk Ho were elected to
serve in Class I until the annual meeting to be held in 1997 and until their
successors have been duly elected and qualified; Messrs. Wang Faren and Han
Jian Zhun were elected to serve in Class II until the annual meeting to be held
in 1998 and until their successors have been duly elected and qualified; and
Messrs. Yang Jiangang, Li Shunxing and Zhang Yibing were elected to serve in
Class III until the annual meeting to be held in 1999 and until their
successors have been duly elected 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, 1996 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 30 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.
-31-
<PAGE> 32
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Based upon the Company's review of Forms 3 and 4 furnished to the
Company during its fiscal year ended December 31, 1996, and Forms 5 furnished
to the Company with respect to its fiscal year ended December 31, 1996, the
following beneficial owner of more than ten percent (prior to the reported
transaction) of the Company's Common Stock reported a transaction on Form 5
which was previously reportable on Form 4: Everbright Finance & Investment
Company Limited untimely filed a Form 5 on February 18, 1997, which reported a
reportable transaction which occurred as of December 31, 1996.
[Item 11] EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION> -----------------
Annual Compensation Long Term
Compensation
-----------------------------------------------------
Other Securities
Annual Underlying All Other
Salary Bonus Compensation Options Compensation
Name and Principal Position Year (US$) (US$) (US$) (#) (1) (US$)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Li Shunxing, President 1996 -0- -0- -0- -0-
-0-
1995 -0- -0- -0- -0- -0-
1994 -0- -0- -0- -0- -0-
Han Jian Zhun, Vice
President, President of 1996 1,550 -0- -0- 600 -0-
HARC
1995 646 -0- -0- 600 -0-
1994 -0- -0- -0- -0- -0-
Li Fel Lie, Projfect Manager,
Vice President of 1996 31,008 2,584 38,759 10,000 -0-
1995 56,363 -0- -0- 10,000 -0-
1994 28,994 -0- -0- -0- -0-
==============================================================================================================
</TABLE>
<TABLE>
<CAPTION>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
- -------------------------------------------------------------------------------------------------------------
Potential Realizable Value at
Assumed Annual Rates of Stock
Individual Grants Price Appreciation for Option Term
--------------------------------------------------------------------------------------------
% of Total
Number of Options
Securities Granted to
Underlying Employees Exercise
Options in Fiscal Price (2) Expiration
Name Granted(#)(1) Year (1) (US$/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 600 0.25% 4.20 05/20/06 -0- $1,585 $4,016
Li Fei Lie 10,000 4.17% 4.20 05/20/06 -0- $26,414 $66,937
===============================================================================================================
</TABLE>
-32-
<PAGE> 33
(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. None of such options was "in-the-money" at such date, as
the fair market value (as defined in the Company's Stock Option Plan and
adjusted as a result of the one-for-ten reverse stock split) of the Common
Stock on December 31, 1996, was US$2.81 per share.
The Company paid its Chief Executive Officer, Li Shunxing, no annual
salary or bonus in 1994, 1995 and 1996. During the fiscal years ended December
31, 1994, 1995 and 1996, 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, HK$5,000 (US$646) for the year ended December 31,
1995, and HK$12,000 (US$1,550) for the year ended December 31, 1996. 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$1,550) 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 annual compensation of US$28,994 for the year
ended December 31, 1994, HK$436,250 (US$56,363) for the year ended December 31,
1995, and HK$560,000 (US$72,351) for the year ended December 31, 1996. 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$31,008) 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$113,695), 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$21,964) 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$21,964) 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, 1996, a consulting fee of
HK$2,040,000 (US$263,566), 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, 1996, 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.
-33-
<PAGE> 34
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 B Preferred Stock outstanding as
of April 14, 1997, 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>
Everbright Finance & Investment 334,800 Common Stock 5.79%
Co. Limited (2)
23/F., Office Tower 3,200,000 Series B Preferred 100%
Convention Plaza
1 Harbour Road
Wanchai, Hong Kong
Worlder International Company 486,000 Common Stock 8.41%
Limited (3)
21/F., Great Eagle Centre
No. 23 Harbour Road
Hong Kong
Lowrey Capital Management 290,574 Common Stock 5.03%
International, L.L.C.
10 Mill Pond Lane
Simsbury, CT 06070
</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 334,800 shares of Common Stock indicated, Everbright Finance &
Investment Co. Limited ("Everbright") directly owns 199,800 shares, and the
remaining 135,000 shares represent one-half of the 270,000 shares of Common
Stock owned by Silverich Limited, which is one-half owned by Everbright and
one-half owned by Worlder International Company Limited.
(3) Of the 486,000 shares of Common Stock indicated, Worlder International
Company Limited ("Worlder") directly owns 351,000 shares, and the remaining
135,000 shares represent one-half of the 270,000 shares of Common Stock owned
by Silverich Limited, which is one-half owned by Worlder and one-half owned by
Everbright.
SHARE OWNERSHIP OF OFFICERS AND DIRECTORS
The following table sets forth certain information with respect to the
beneficial ownership of Common Stock as of April 14, 1997, 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.
-34-
<PAGE> 35
<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 216,000 Common Stock (2) 3.74%
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 43,200 Common Stock(6) 0.75%
All executive officers 259,200 Common Stock 4.49%
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 216,000 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 600 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 600 shares of Common Stock
under the Company's Stock Option Plan as described under "Stock Options,"
below.
(4) Tam Cheuk Ho was granted options to purchase 600 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 10,000 shares of Common Stock
under the Company's Stock Option Plan as described under "Stock Options,"
below.
(6) Brender Services Limited owns 43,200 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 10,000
shares of Common Stock under the Company's Stock Option Plan, and Mr. Wong was
granted options to purchase 600 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 could 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
-35-
<PAGE> 36
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:
<TABLE>
<S> <C>
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
</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
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.
On January 30, 1996, the shareholders of the Company adopted an
amendment to the Plan (a) to change the number of shares of Common Stock
subject to the Plan to 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, and (b)
to allow Nonqualified Stock Options, as defined in the
-36-
<PAGE> 37
Plan, to be exercisable in less than one year (no currently outstanding options
were changed by such amendment). Also, by virtue of the one-for-ten reverse
stock split approved by the shareholders on January 30, 1996, and made
effective by the board of directors on December 31, 1996, the number of shares
subject to each outstanding option was reduced by a factor of ten, and the
exercise price for the outstanding options was increased to US$4.20 per share
(the fair market value of the Common Stock as of May 20, 1996, multiplied by
ten). Other terms of the outstanding options were not affected, and the
following stock options, which have been granted with respect to 240,000 shares
of Common Stock, remain outstanding:
<TABLE>
<S> <C>
Yiu Yat Hung 600 shares
Tam Cheuk Ho 600 shares
Han Jian Zhun 600 shares
Wong Wah On 600 shares
Li Fei Lie 10,000 shares
Brender Services Limited 10,000 shares
Cheung Yu Shum 50,000 shares
Tse Chi Kai 30,000 shares
Ma Sin Ling 50,000 shares
Cheung Siu Yin 1,000 shares
Woo Pui Yan 1,000 shares
Kwok Kwan Hung 38,600 shares
Fu Yang Guang 20,000 shares
Lin Jia Ping 27,000 shares
</TABLE>
[Item 13] CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following transactions with the management of the Company and
others are 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 (US$12 million) in assets and cash was to be contributed as
follows: the Farming Bureau (39%), Guilinyang Farm (5%) and Billion Luck
(56%).
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$627,711).
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$602,410) 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$602,410). In accordance with the terms of the agreement, HARC will be
entitled to a minimum annual return of Rmb1 million ($120,482) 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$20,511) 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 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
-37-
<PAGE> 38
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.
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$602,410), 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$4,819,277). For the two
years ended December 31, 1994 and 1995, no such payment was made by HARC under
the Agreement because the financial criteria for such payment was not met. For
the year ended December 31, 1996, the maximum amount of Rmb5 million
(US$602,410) was paid by HARC to the Farming Bureau.
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 (US$361,446) and Rmb3 million (US$361,446)
for each of the year 1995 and 1996, respectively.
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 (US$361,446) and Rmb3 million
(US$361,446) for each of the year 1995 and 1996, respectively.
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 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 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
-38-
<PAGE> 39
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, 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, 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. As
of May 20, 1996, the Board, 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 became exercisable
beginning on May 20, 1997, and until May 20, 2006. On December 30, 1996, the
shareholders of the Company adopted an amendment to the Plan (a) to change the
number of shares of Common Stock subject to the Plan to 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, and (b) to allow Nonqualified Stock Options, as defined
in the Plan, to be exercisable in less than one year (no currently outstanding
options were changed by such amendment). Also, by virtue of the one-for-ten
reverse stock split approved by the shareholders on December 30, 1996, and made
effective by the board of directors on December 31, 1996, the number of shares
subject to each outstanding option was reduced by a factor of ten, and the
exercise price for the outstanding options was increased to US$4.20 per share
(the fair market value of the Common Stock as of May 20, 1996, multiplied by
ten). Other terms of the outstanding options were not affected, and all of the
outstanding stock options, which have been granted with respect to 240,000
shares of Common Stock, remain outstanding. 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$21,964) 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$21,964) 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, 1996, a consulting fee of
HK$2,040,000 (US$263,566) 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$1,550) 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.
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$240,000 (US$31,008) 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 two fiscal years ended December 31, 1995 and 1996, 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
-39-
<PAGE> 40
Operating Subsidiaries to the broker which amounted to Rmb4.4 million
(US$530,120) and Rmb3.5 million (US$421,687) in 1995 and 1996, respectively.
On March 25, 1996, HARC entered into a Loan Agreement with the Farming
Bureau by which HARC borrowed Rmb35,867,857 (US$4,321,429) in order to more
effectively utilize capital raised and to enable HARC to more effectively plan
for its production operations and new investment projects for fiscal year 1996.
The loan is interest-free and is to be repaid by conversion of the loan
into registered capital of HARC upon the approval for such conversion by
relevant government authorities.
On December 31, 1996, a supplementary agreement was entered into
between the same parties by which a new article was created to impose a right
of set off against the loan or any additional loan made by the Farming Bureau
to HARC against any amounts due to HARC by the Farming Bureau and/or its
subsidiary companies and affiliates.
On March 25, 1996, HARC entered into a Loan Agreement with the Company
by which HARC borrowed Rmb45,650,000 (US$5,500,000) in order to more
effectively utilize capital raised and to enable HARC to more effectively plan
for its production operations and new investment projects for fiscal year 1996.
The loan is interest-free, and it is to be repaid by conversion of the loan
into registered capital of HARC upon the approval for such conversion by
relevant government authorities.
On July 22, 1996, the Company entered into an Exchange Agreement with
Everbright Finance & Investment Co. Limited, pursuant to which all 6,400,000
outstanding shares of the Company's Series A Preferred Stock held by Everbright
were exchanged for 32,000,000 shares of Common Stock, which were subject to
substantial restrictions. Such restrictions included a waiver for seven years
of rights to dividends and distributions upon dissolution and liquidation of
the Company, and a waiver for eight years of the ability to have the shares
included in any registration statement filed by the Company.
On August 9, 1996, HARC entered into a rental agreement with the
Hainan Farming Bureau Testing Center, an affiliate of the Farming Bureau
located on the same floor of the building where HARC's headquarters is located.
The term of the lease is for a period of eight years (through September 30,
2004) at an annual rental of Rmb72,000 (US$8,675), and it covers an area of
approximately 314 square meters.
As of October 1, 1996, the Farming Bureau, Guilinyang Farm and Billion
Luck entered into a Shareholders' Agreement on Business Restructuring by which
the operations of HARC, First Supply and Second Supply were restructured with
effect from October 1, 1996. The restructuring was aimed to simplify and
streamline the corporate structure of the Operating Subsidiaries by
consolidating the various trading and servicing divisions into a few principal
trading and servicing divisions. Certain non-core assets, liabilities and
surplus employees were transferred to the Farming Bureau.
As of October 1, 1996, and concurrent with the execution of the
Shareholders' Agreement on Business Restructuring, the Farming Bureau, HARC,
First Supply and Second Supply entered into an Asset and Staff Transfer
Agreement by which certain non-core assets and liabilities with a net
liabilities value of Rmb64.6 million (US$7.78 million), as determined by an
independent professional valuer in the PRC, as well as certain surplus
employees of the Operating Subsidiaries, were transferred to the Farming
Bureau.
As of December 31, 1996, the Company entered into another Exchange
Agreement with Everbright Finance & Investment Co. Limited, pursuant to which
the 32,000,000 pre-reverse-split shares of restricted Common Stock were
exchanged for 3,200,000 post-reverse-split shares of the Company's Series B
Preferred stock. The terms of the Series B Preferred stock were amended by the
Board of Directors in connection with the new Exchange Agreement, and such
Series B Preferred stock is not convertible and has no dividend rights or
rights to receive distributions upon dissolution and liquidation of the
Company. The Series B Preferred stock also may not be included in any
registration statement filed by the Company, and the Company will not take any
action to facilitate the registration of the Series B Preferred stock, until
after July 22, 2000.
In addition to these transactions, the following business
relationships existed during the fiscal year ended December 31, 1996, 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.
-40-
<PAGE> 41
[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 auditors' report, together with
consolidated financial statements for the Company and
subsidiaries, including:
a. Consolidated statements of income for the
three years ended December 31, 1994, 1995 and
1996
b. Consolidated statements of changes in
shareholders' equity for the three years
ended December 31, 1994, 1995 and 1996
c. Consolidated balance sheets as of December
31, 1995 and 1996
d. Consolidated statements of cash flows for the
three years ended December 31, 1994, 1995 and
1996
e. Notes to consolidated financial statements.
2. 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. Notes to unaudited pro forma consolidated financial information.
The following Exhibits are filed as part of this Form 10-K:
<TABLE>
<CAPTION>
Exhibit No. Exhibit Description
----------- -------------------
<S> <C>
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.)
</TABLE>
-41-
<PAGE> 42
<TABLE>
<S> <C>
3.6 Certificate of Amendment of Articles of Incorporation of the
Registrant, effective December 30, 1996 (Filed herewith.)
3.7 Amended and Restated By-laws of the Registrant, as amended on
December 30, 1996 (Filed herewith.)
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.)
4.2 Certificate of Amendment of Certificate of Designation of
Series B Convertible Preferred Stock, effective December 31,
1997 (Filed herewith.)
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 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.)
</TABLE>
-42-
<PAGE> 43
<TABLE>
<S> <C>
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.)
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.)
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.)
</TABLE>
-43-
<PAGE> 44
<TABLE>
<S> <C>
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 with
Annual Report on Form 10-K for the fiscal year ended December
31, 1995, and incorporated herein by reference.)
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 with
Annual Report on Form 10-K for the fiscal year ended December
31, 1995, and incorporated herein by reference.)
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
with Annual Report on Form 10-K for the fiscal year ended
December 31, 1995, and incorporated herein by reference.)
10.24 Employment Agreement between Billion Luck and Han Jian Zhun,
dated August 1, 1995 (Filed with Annual Report on Form 10-K
for the fiscal year ended December 31, 1995, and incorporated
herein by reference.)
10.25 Employment Agreement between Billion Luck and Li Fei Lie,
dated August 1, 1995 (Filed with Annual Report on Form 10-K
for the fiscal year ended December 31, 1995, and incorporated
herein by reference.)
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 with
Annual Report on Form 10-K for the fiscal year ended December
31, 1995, and incorporated herein by reference.)
10.27 Exchange Agreement, by and between the Registrant and
Everbright Finance & Investment Co. Limited, dated July 22,
1996 (Filed with Quarterly Report on Form 10-Q for the fiscal
quarter ended September 30, 1996, and incorporated herein by
reference.)
10.28 Loan Agreement between HARC and the Farming Bureau, dated
March 25, 1996, and the supplementary agreement dated December
31, 1996 (Certified English translation of original Chinese
version filed herewith.)
10.29 Loan Agreement between HARC and the Registrant, dated March
25, 1996 (Certified English translation of original Chinese
version filed herewith.)
10.30 Rental Agreement between HARC and the Hainan Farming Bureau
Testing Center, dated August 9, 1996 (Certified English
translation of original Chinese version filed herewith.)
10.31 Shareholders' Agreement on Business Restructuring among the
Farming Bureau, Guilinyang Farm and Billion Luck, dated as of
October 1, 1996 (Certified English translation of original
Chinese version filed herewith.)
</TABLE>
-44-
<PAGE> 45
<TABLE>
<S> <C>
10.32 Assets and Staff Transfer Agreement among the Farming Bureau,
HARC, First Supply and Second Supply, dated as of October 1,
1996 (Certified English translation of original Chinese
version filed herewith.)
10.33 Exchange Agreement, by and between the Registrant and
Everbright Finance & Investment Co. Limited, dated December
31, 1996 (Filed herewith.)
10.34 China Resources Development, Inc., Amended and Restated 1995
Stock Option Plan, as amended on December 30, 1996 (Filed
herewith.)
11.3 Computation of Earnings Per Share for Fiscal Year ended
December 31, 1996 (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.)
27.4 Financial Data Schedule (Filed herewith. For SEC use only.)
99.4 Notice of Annual Meeting, Proxy Statement and Proxy
distributed to shareholders in advance of annual meeting held
on December 30, 1996 (Filed with Schedule 14A dated December
20, 1996, and incorporated herein by reference.)
</TABLE>
During the last quarter of the fiscal year ended December 31, 1996,
the Company filed no reports on Form 8-K.
-45-
<PAGE> 46
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: /s/ Li Shunxing
------------------------------
Li Shunxing, President
Date: April 14, 1997
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.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Yang Jiangang Chairman of the Board of April 14, 1997
- ------------------------------------------- Directors
Yang Jiangang
/s/ Li Shunxing President/Director April 14, 1997
- -------------------------------------------
Li Shunxing
/s/ Wang Faren Vice Chairman of the April 14, 1997
- ------------------------------------------- Board of Directors
Wang Faren
/s/ Yiu Yat Hung Vice Chairman of the April 14, 1997
- ------------------------------------------- Board of Directors
Yiu Yat Hung
/s/ Han Jian Zhun Vice President/Director April 14, 1997
- -------------------------------------------
Han Jian Zhun
/s/ Tam Cheuk Ho Chief Financial Officer/ April 14, 1997
- ------------------------------------------- Director
Tam Cheuk Ho
/s/ Zhang Yibing Secretary/Director April 14, 1997
- -------------------------------------------
Zhang Yibing
/s/ Wong Wah On Financial Controller April 14, 1997
- -------------------------------------------
Wong Wah On
</TABLE>
-46-
<PAGE> 47
APPENDIX A
FINANCIAL STATEMENTS
1. Manually signed, independent auditors' report, together with
consolidated financial statements for the Company and
subsidiaries, including:
a. Consolidated statements of income for the three years
ended December 31, 1994, 1995 and 1996
b. Consolidated statements of changes in shareholders'
equity for the three years ended December 31, 1994,
1995 and 1996
c. Consolidated balance sheets as of December 31, 1995
and 1996
d. Consolidated statements of cash flows for the three
years ended December 31, 1994, 1995 and 1996
e. Notes to consolidated financial statements.
2. 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. Notes to unaudited pro forma consolidated financial information.
-47-
<PAGE> 48
Consolidated Financial Statements
CHINA RESOURCES DEVELOPMENT INC AND SUBSIDIARIES
December 31, 1994, 1995 and 1996
<PAGE> 49
CHINA RESOURCES DEVELOPMENT INC AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Pages
<S> <C>
Report of independent auditors F-1
Consolidated statements of income F-2
Consolidated statements of changes in
shareholders' equity F-3
Consolidated balance sheets F4 - F5
Consolidated statements of cash flows F-6
Notes to consolidated financial statements F-7 - F-40
</TABLE>
<PAGE> 50
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
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, 1995 and 1996, and the related consolidated statements of
income, changes in shareholders' equity, and cash flows for the years ended
December 31, 1994, 1995 and 1996. 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, 1995 and 1996, and the consolidated results of its
operations and its cash flows for the years ended December 31, 1994, 1995 and
1996, in conformity with accounting principles generally accepted in the United
States of America.
ERNST & YOUNG
Hong Kong
March 10, 1997, except for
Note 25, as to which the date is March 31, 1997
F-1
<PAGE> 51
CHINA RESOURCES DEVELOPMENT INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands except share and per share data)
<TABLE>
<CAPTION>
Year ended December 31,
Notes 1994 1995 1996 1996
------------------------------------------------------------------
RMB RMB RMB US$
<S> <C> <C> <C> <C> <C>
NET SALES 1,308,248 1,957,243 1,827,499 220,181
COST OF SALES (1,263,309) (1,851,186) (1,677,056) (202,055)
---------- ---------- ---------- ----------
GROSS PROFIT 44,939 106,057 150,443 18,126
DEPRECIATION OF FIXED
ASSETS (1,129) (2,820) (1,813) (218)
SELLING AND ADMINISTRATIVE
EXPENSES (24,627) (54,442) (50,488) (6,083)
---------- ---------- ---------- ----------
OPERATING INCOME 19,183 48,795 98,142 11,825
FINANCIAL INCOME/(EXPENSES),
NET 4 2,568 (33,212) (19,870) (2,394)
OTHER INCOME, NET 5 5,612 28,654 6,054 729
REORGANIZATION EXPENSES 6 (3,029) -- -- --
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES 24,334 44,237 84,326 10,160
INCOME TAXES 7 (3,663) (6,909) (13,991) (1,686)
---------- ---------- ---------- ----------
INCOME BEFORE MINORITY
INTERESTS 20,671 37,328 70,335 8,474
MINORITY INTERESTS (10,389) (18,153) (34,513) (4,158)
---------- ---------- ---------- ----------
NET INCOME 10,282 19,175 35,822 4,316
========== ========== ========== ==========
EARNINGS PER SHARE 3(j) 8.57 15.56 9.55 1.15
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
<PAGE> 52
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 Series B Additional
Common preferred preferred preferred paid-in Retained
stock stock stock stock capital Reserves earnings Total
---------------------------------------------------------------------------------
Notes RMB RMB RMB RMB RMB RMB RMB RMB
Total
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
120,000 shares of common
stock outstanding after a
reverse stock split of
6.67 to 1 13 10 - - - 638 - - 648
Issuance of 1,080,000
shares of common stock
pursuant to the Reverse
Acquisition (as defined
hereinafter) 13 91 - - - 769 - - 860
Net income - - - - - - 10,282 10,282
Transfer to reserves 20 - - - - - 2,657 ( 2,657) -
- -------- ------ -------- ------ ------- ------ ------ -------
Balance at December 31,
1994 101 - - - 1,407 2,657 7,625 11,790
Issuance of 6,400,000
shares of series A
preferred stock 13 - 53,930 - - - - - 53,930
Issuance of 370 shares of
series B convertible
preferred stock, net of
share offering costs 13 - - - - 19,554 - - 19,554
Net income - - - - - - 19,175 19,175
Transfer to reserves 20 - - - - - 6,273 ( 6,273) -
-------- ------ -------- ------ ------- ------ ------ -------
Balance at December 31,
1995 101 53,930 - - 20,961 8,930 20,527 104,449
Issuance of 1,283 shares of
series B convertible
preferred stock, net of
share offering costs 13 - - - - 72,520 - - 72,520
Conversion of 1,653 shares of
series B convertible preferred
stock to 4,579,004 shares
of common stock 13 383 - - - ( 383) - - -
Exchange of 6,400,000
shares of series A preferred
stock for 3,200,000 shares
of common stock with substantial
restrictions ("Restricted
Common Stock") 13 270 (53,930) - - 53,660 - - -
Exchange of 3,200,000 shares
of Restricted Common Stock
for 3,200,000 shares of
series B preferred stock 13 ( 270) - - 270 - - - -
Reverse stock split, ten-to-one 13 ( 436) - - - 436 - - -
Net income - - - - - - 35,822 35,822
Transfer to reserves 20 - - - - - 8,818 ( 8,818) -
-------- ------ -------- ------ ------- ------ ------ -------
Balance at December 31,
1996 48 - - 270 147,194 17,748 47,531 212,791
==== ======== ====== ======== ====== ======= ====== ====== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 53
CHINA RESOURCES DEVELOPMENT INC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands except share and per share data)
<TABLE>
<CAPTION>
December 31,
Notes 1995 1996 1996
------------------------------------------
RMB RMB US$
ASSETS
CURRENT ASSETS
<S> <C> <C> <C> <C>
Cash and cash equivalents 56,942 131,006 15,784
Trade receivables (allowances for doubtful accounts
in 1995 and 1996 - Nil) 31,991 4,212 508
Other receivables, deposits and
prepayments 52,871 48,755 5,874
Inventories 8 103,776 55,452 6,681
Amounts due from related companies 15 288,503 147,221 17,737
Amount due from Farming Bureau 15 80,427 298,570 35,972
Other current assets 19,448 - -
----------- -------- ---------
TOTAL CURRENT ASSETS 633,958 685,216 82,556
FIXED ASSETS 9 21,491 6,504 784
INVESTMENTS 10 11,963 12,344 1,487
GOODWILL 1,076 1,049 126
------------ -------- -------
TOTAL ASSETS 668,488 705,113 84,953
======= ======= =======
</TABLE>
F-4
<PAGE> 54
CHINA RESOURCES DEVELOPMENT INC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
(Amounts in thousands except share and per share data)
<TABLE>
<CAPTION>
December 31,
Notes 1995 1996 1996
---------------------------------------------
RMB RMB US$
<S> <C> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS'
EQUITY
CURRENT LIABILITIES
Bank loans 11 293,000 292,560 35,248
Short term advances 12 86,917 -- --
Accounts payable 39,876 25,848 3,114
Other payables and accrued liabilities 21,533 43,295 5,216
Amounts due to related companies 15 22,654 -- --
Amounts due to shareholders 15 15,727 4,976 600
Income taxes payable 10,265 17,063 2,056
------- ------- ------
TOTAL CURRENT LIABILITIES 489,972 383,742 46,234
MINORITY INTERESTS 74,067 108,580 13,082
------- ------- ------
TOTAL LIABILITIES AND MINORITY
INTERESTS 564,039 492,322 59,316
------- ------- ------
COMMITMENTS AND CONTINGENCIES 21
SHAREHOLDERS' EQUITY
Common stock, US$0.001 par value:
Authorized - 200,000,000 shares
in 1996 and 1995
Issued and outstanding -
5,779,004 shares in 1996 and
1,200,000 shares in 1995 13 101 48 6
Preferred stock, authorized -
10,000,000 shares in 1996
and 1995:
Series A preferred stock, US$1 par value:
Authorized, issued and
outstanding - Nil in 1996 and
6,400,000 shares in 1995 13 53,930 -- --
Series B convertible preferred
stock, US$0.001 par value:
Authorized - Nil in 1996 and
2,500 shares in 1995
Issued and outstanding - Nil in
1996 and 370 shares in 1995 13 -- -- --
Series B preferred stock, US$0.001
par value:
Authorized - 3,200,000 shares in
1996 and nil in 1995
Issued and outstanding - 3,200,000
shares in 1996 and nil in 1995 -- 270 32
Additional paid-in capital 13 20,961 147,194 17,734
Reserves 20 8,930 17,748 2,138
Retained earnings 20,527 47,531 5,727
------- ------- ------
TOTAL SHAREHOLDERS' EQUITY 104,449 212,791 25,637
------- ------- ------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY 668,488 705,113 84,953
======= ======= ======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 55
CHINA RESOURCES DEVELOPMENT INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands except share and per share data)
<TABLE>
<CAPTION>
Year ended December 31,
1994 1995 1996 1996
-----------------------------------------
<S> <C> <C> <C> <C> <C>
Note RMB RMB RMB US$
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income 10,282 19,175 35,822 4,316
Adjustments to reconcile net income to net cash
used in operating activities:
Minority interests 10,389 18,153 34,513 4,158
Depreciation and amortization 1,129 2,848 1,840 222
Reorganization expenses 926 -- -- --
Gain on disposal of fixed assets -- (1,326) -- --
Decrease/(increase) in assets:
Trade receivables (7,297) (9,995) (64,774) (7,804)
Other receivables, deposits and prepayments (22,438) (8,249) (38,549) (4,644)
Inventories (24,902) (12,025) 20,338 2,450
Amount due from Farming Bureau -- (80,427) (26,061) (3,140)
Amounts due from related companies 76,054 (23,793) (65,718) (7,918)
Other current assets -- (5,054) 5,054 609
Increase/(decrease) in liabilities:
Amounts due to related companies (47,026) (813) 113,280 13,648
Accounts payable (35,147) (2,364) 47,661 5,743
Income taxes payable 3,663 6,602 6,798 819
Other payables and accrued liabilities 6,596 (6,647) 59,697 7,192
Amount due to Farming Bureau 24,295 (14,978) -- --
------- -------- -------- -------
Net cash used in/(provided by) operating activities (3,476) (118,893) 129,901 15,651
------- -------- -------- -------
CASH FLOWS PROVIDED BY/(USED IN)
INVESTING ACTIVITIES
Purchases of fixed assets (1,930) (4,275) (2,663) (321)
Additions to construction in progress (5,249) -- -- --
Purchases of investments (10,003) -- (2,342) (282)
Acquisition of subsidiaries (1,104) -- -- --
Proceeds from sale of construction in progress -- 19,299 -- --
Proceeds from sale of fixed assets 91 1,935 16 2
Proceeds from the sale of investments 108 59 -- --
Cash remitted to Farming Bureau (16,966) -- -- --
Loans to related companies (23,684) (1,072) (67,046) (8,078)
Cash from repayment of loans by related companies 57,182 -- -- --
------- -------- -------- -------
Net cash used in investing activities (1,555) (4,054) (72,035) (8,679)
------- -------- -------- -------
CASH FLOWS PROVIDED BY/(USED IN)
FINANCING ACTIVITIES
Issue of share capital less share offering costs 860 9,831 86,914 10,472
Loans from shareholders 63,850 5,807 -- --
Repayment of loans from shareholders -- -- (15,727) (1,895)
Cash injected by minority interests 16 48,458 -- -- --
Proceeds from bank borrowings 8,000 175,000 -- --
Repayments of bank borrowings (46,980) (170,323) (440) (53)
Loan from Farming Bureau -- -- 35,868 4,321
Short term advances -- 86,917 -- --
Repayment of short term advances -- -- (86,917) (10,472)
Loans from related companies -- 3,500 -- --
Repayment of loans from related companies -- -- (3,500) (422)
------- -------- -------- -------
Net cash provided by financing activities 74,188 110,732 16,198 1,951
------- -------- -------- -------
NET INCREASE/(DECREASE) IN CASH AND CASH
EQUIVALENTS 69,157 (12,215) 74,064 8,923
Cash and cash equivalents, at beginning of year -- 69,157 56,942 6,861
------- -------- -------- -------
Cash and cash equivalents, at end of year 69,157 56,942 131,006 15,784
======= ======== ======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 56
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 120,000 issued and outstanding shares of common stock of
US$0.001 par value, after adjusting for a reverse stock split
in 1996 (note 13), and no other debt or equity securities of
Magenta were outstanding; and
(iii) the issuance to the Billion Luck Shareholders of an aggregate
of 1,080,000 shares of common stock of the Company, after
adjusting for the reverse stock split in 1996, 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,
supplies and other agricultural products.
F-7
<PAGE> 57
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:
Billion Luck 56%
Guilinyang State Farm 5%
Farming Bureau 39%
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 dates 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, 1995 and 1996, cash and cash equivalents
included foreign currency deposits equivalent to RMB17,839
(US$2,003 and HK$1,092) and RMB37,772 (US$3,445 and
HK$8,578), respectively.
F-8
<PAGE> 58
CHINA RESOURCES DEVELOPMENT INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share and per share data)
3. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (continued)
(c) Inventories
Inventories are stated at the lower of cost and market value.
Cost is determined using the first-in, first-out method.
(d) Fixed assets and depreciation
Fixed assets are stated at cost less accumulated
depreciation.
Depreciation of fixed assets is calculated on the
straight-line basis to write off the cost less estimated
residual value of each asset over its estimated useful life.
The principal annual rates used for this purpose are as
follows:
Buildings 4%
Leasehold improvements Over the term of the lease
Machinery, equipment and motor vehicles 8-10%
(e) Investments
Investments are stated at cost less provisions for known
losses and permanent diminutions in values, if any.
(f) Foreign currency translations
The subsidiaries' financial records except for Billion Luck
are maintained and the statutory financial statements are
stated in Renminbi ("RMB"), the national currency of the PRC.
Foreign currency transactions and monetary assets and
liabilities denominated in foreign currencies are translated
into RMB at the respective applicable rates of exchange
quoted by the People's Bank of China (the "Unified Exchange
Rate"). Monetary assets and liabilities denominated in
foreign currencies are translated into RMB at the applicable
Unified Exchange Rate at the respective balance sheet dates.
The resulting exchange gains or losses are credited or
charged to the consolidated statements of income.
The books and records of the Company and Billion Luck are
maintained in United States dollars ("US$") and Hong Kong
dollars ("HK$"), respectively. The records of the Company and
Billion Luck are remeasured into RMB using the respective
applicable Unified Exchange Rate prevailing at the date of
the transactions. Monetary assets and liabilities in HK$ 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.
F-9
<PAGE> 59
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)
The 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, 1996 of US$1.00 = RMB8.30, and accordingly,
differs from the underlying foreign currency amounts. No
representation is made that the RMB amounts could have been,
or could be, converted into US$ at that rate on December 31,
1996 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 22.
(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 and pro forma
primary earnings per share for the year ended December 31,
1996 is based on the weighted average number of common stock
outstanding after giving effect to dilutive stock options,
which are included as common stock equivalents using the
treasury stock method and assumed to be converted to common
stock. The number of shares used in computing the primary
earnings per share was 3,752,682 as if the ten-to-one reverse
stock split of the Company's common stock as set out in note
13 ("Reverse Stock Split") had been completed at the
beginning of the year. Fully diluted earnings per share is
not materially different from primary earnings per share.
The computation of primary earnings per share and pro forma
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 stock 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 1,232,607 as if the Reverse Stock Split had been
completed at the beginning of the year. Fully diluted
earnings per share is not materially different from primary
earnings per share.
F-10
<PAGE> 60
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)
(j) Earnings per share (continued)
For the year ended December 31, 1994, primary earnings per
share is based on an aggregate of 1,200,000 shares of common
stock outstanding as if the Reverse Acquisition and the
Reverse Stock Split had been completed at the beginning of
the year.
(k) 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".
(l) Futures contracts
The Group enters into natural rubber and coffee bean
commodity futures contracts to hedge the price risk
associated with existing natural rubber and coffee bean
inventories and certain firm commitments for the purchase of
natural rubber. Any gains or losses on qualifying hedges are
recognized as an adjustment of the carrying amount of the
inventories being hedged or are deferred and included as part
of the cost of inventories received under the firm purchase
commitments.
As of December 31, 1996, the Group had deferred gains from
such contracts for the hedging of existing inventories of
RMB6,715 which was adjusted to the carrying value of the
inventories being hedged.
As of December 31, 1995, the Group had deferred losses from
such contracts for the hedging of firm purchase commitments
of RMB5,054 which was recorded as other current assets.
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 years ended December 31, 1996 and 1995, the Group
realized a net gain of RMB1,374 and RMB10,614, respectively,
on such transactions (note 5).
(m) 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.
F-11
<PAGE> 61
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>
Year ended December 31,
---------------------------------
1994 1995 1996
RMB RMB RMB
<S> <C> <C> <C>
Interest expenses (22,951) (52,409) (48,495)
Interest income 25,879 18,575 29,602
Foreign exchange gains/(losses), net (360) 622 (977)
------- ------- -------
2,568 (33,212) (19,870)
======= ======= =======
</TABLE>
5. OTHER INCOME, NET
Other income represents:
<TABLE>
<CAPTION>
Year ended December 31,
1994 1995 1996
----------------------------
Notes RMB RMB RMB
<S> <C> <C> <C> <C>
Income from long term investments 1,033 2,000 1,525
Rental income 1,235 5,297 3,474
Net gains on trading of commodity
futures contracts 3(1) -- 10,614 1,374
Management fees income 15(k) -- 6,000 6,000
Service fee to the Farming
Bureau 15(h) -- -- (5,000)
Others 3,344 4,743 (1,319)
------ ------ ------
5,612 28,654 6,054
====== ====== ======
</TABLE>
F-12
<PAGE> 62
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 year ended 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, 1996. 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 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 in the PRC,
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.
Hainan Agricultural is subject to a tax rate of 15% on income reported
in its statutory financial statements. However, 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
(date of registration) to December 1994 (tax saving attributable to
the Group of RMB281 or RMB0.23 per share, after adjusting for the
Reverse Stock Split in 1996), 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 RMB0.17 per share, after
adjusting for the Reverse Stock Split in 1996). There will be no tax
deduction thereafter.
Pretax income from continuing operations for the years ended December
31, 1994, 1995 and 1996 was originated in the PRC.
F-13
<PAGE> 63
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>
Year ended December 31,
1994 1995 1996
----------------------------
RMB RMB RMB
<S> <C> <C> <C>
Statutory PRC tax rate 15% 15% 15%
Computed expected tax expenses 3,650 6,636 12,649
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 1,160
Others (175) (22) 182
------ ------- ------
3,663 6,909 13,991
====== ======= ======
</TABLE>
Undistributed earnings of the Company's foreign subsidiaries amounted
to RMB55,190 at December 31, 1996 (1995: RMB22,995). 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 tax
in respect of these undistributed earnings as at December 31, 1996 was
RMB18,765 (1995: 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 temporary differences is considered
minimal.
F-14
<PAGE> 64
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,
Note 1995 1996
RMB RMB
<S> <C> <C> <C>
Finished goods 105,002 62,167
Less: Deferred gains on related hedging
futures contracts 3(1) -- (6,715)
Provision for diminution in value (1,226) --
-------- -------
Finished goods, net 103,776 55,452
======== =======
<CAPTION>
Year ended December 31,
1995 1996
-------------------
RMB RMB
<S> <C> <C>
Movement of provision for diminution
in value:
Balance at beginning of year -- 1,226
Provision for the year 1,226 --
Written-back on disposal during the year -- (1,226)
-------- -------
Balance at end of year 1,226 --
======== =======
</TABLE>
F-15
<PAGE> 65
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,
1995 1996
--------------------
RMB RMB
<S> <C> <C>
Cost
Buildings and leasehold improvements 5,739 3,806
Machinery, equipment and motor vehicles 18,715 5,909
-------- -------
24,454 9,715
Accumulated depreciation (2,963) (3,211)
-------- -------
Net book value 21,491 6,504
======== =======
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, 1996
amounted to RMB430 (1995:
RMB430 and 1994: RMB201).
10. INVESTMENTS
Investments comprise:
<TABLE>
<CAPTION>
December 31,
1995 1996
---------------------
RMB RMB
<S> <C> <C>
At cost:
Unlisted shares 1,310 601
PRC government bonds 653 --
PRC joint ventures 10,000 11,743
-------- -------
11,963 12,344
======== =======
</TABLE>
The PRC joint ventures represent First Supply's and Second Supply's
investments in Hainan State-owned Zhong Ya Aluminum Factory ("Zhong
Ya") and Xilian Farm Timber Mill ("Xilian Mill"), of RMB5,000 each as
at December 31, 1996 and 1995, respectively, and Hainan Agricultural's
investment in Hainan Far East Rubber Development Company Limited ("Far
East") of RMB1,743 as at December 31, 1996 (1995: Nil). First Supply,
Second Supply and Hainan Agricultural, all 56% held subsidiaries of
the Group, hold an equity interest of 12.64% (1995: 12.64%) in Xilian
Mill, 5.47% (1995: 5.47%) in Zhong Ya and 30% (1995: Nil) in Far East,
respectively, as at December 31, 1996.
F-16
<PAGE> 66
CHINA RESOURCES DEVELOPMENT INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share and per share data)
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 14.32% per annum as at December 31, 1996
(1995: 18.25% 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.
Pursuant to an Asset and Staff Transfer Agreement, all the bank loans
will be transferred to the Farming Bureau once the proper approval has
been obtained from the relevant banks, and effective from October 1,
1996, interest on the bank loans have been borne by the Farming Bureau
until the effective transfer of the bank loans (notes 15(n) and 25).
12. SHORT TERM ADVANCES
As of December 31, 1995, the Group had short term advances of
RMB86,917 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 was unsecured,
interest-free and was repaid in full in 1996.
13. 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 of the Acquisition Agreement, there
were 120,000 issued and outstanding shares of common stock of
US$0.001 (RMB0.008) 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 1,080,000
shares of common stock of US$0.001 (RMB0.008) par value each of the
Company, after adjusting for the Reverse Stock Split in 1996. 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 (RMB8.32) per share.
F-17
<PAGE> 67
CHINA RESOURCES DEVELOPMENT INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share and per share data)
13. SHARE CAPITAL (continued)
Pursuant to the above-mentioned Action by Written Consent and an
exchange agreement between the Company and certain shareholders of the
Company, long term loans from certain shareholders of the Company of
US$6,400 (RMB53,930) 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.
Pursuant to an exchange agreement dated as of July 22, 1996 between
the Company and the holder of series A preferred stock at that date
(the "Holder"), all the 6,400,000 outstanding shares of series A
preferred stock of the Company were exchanged on a five-for-one basis
to 3,200,000 shares of common stock of the Company (the "Restricted
Common Stock"), after adjusting for the Reverse Stock Split in 1996,
and the Holder waived its rights to participate in dividends and
distributions on dissolution or liquidation in connection with the
Restricted Common Stock for a period of seven years and accepted
limitations on future registration. According to a valuation of the
Restricted Common Stock and series A preferred stock performed by an
independent professional valuer in the United States of America, the
exchange ratio of five Restricted Common Stock for one series A
preferred stock of the Company represents an exchange at fair market
values.
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 (RMB0.008) per share.
F-18
<PAGE> 68
CHINA RESOURCES DEVELOPMENT INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share and per share data)
13. 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, series B
convertible preferred stock of the Company (the "First Share
Offering"). As of December 31, 1995, gross proceeds of US$3,700
(RMB30,825) were received on the issuance of 370 shares of series B
convertible preferred stock at a price of US$10,000 (RMB83,311) per
share. As of March 8, 1996, the closing date of the First Share
Offering, further gross proceeds of US$8,830 (RMB73,511) were received
upon the issuance of 883 shares of series B convertible preferred
stock at a price of US$10,000 (RMB83,251) per share. On June 30, 1996,
the Company issued another Confidential Offshore Offering Memorandum
in another offshore offering (the "Second Share Offering"), with terms
similar to the First Share Offering. As of July 8, 1996, the closing
date of the Second Share Offering, gross proceeds of US$4,000
(RMB33,300) were received on the issuance of 400 shares of series B
convertible preferred stock at a price of US$10,000 (RMB83,251) per
share. After deduction of share offering costs, net proceeds of
RMB19,554 and RMB72,520 were received on the issuance of 370 shares
and 1,283 shares of series B convertible preferred stock for the years
ended December 31, 1995 and 1996, respectively.
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"),
based on a conversion formula set out in the terms of the series B
convertible preferred stock.
During the year ended December 31, 1996, all the 1,653 shares of
series B convertible preferred stock were converted into 4,579,004
shares of common stock of the Company, after adjusting for the Reverse
Stock Split in 1996, in accordance with the terms of the share
offerings.
On December 30, 1996, the Company's shareholders approved a ten-to-one
Reverse Stock Split of the Company's Common Stock, which was made
effective by the Board of Directors on December 31, 1996. With the par
value unchanged at US$0.001 per share, the Reverse Stock Split was
effected by a transfer to the additional paid-in capital account. All
references in the consolidated financial statements referring to share
and per share amounts of the common stock of the Company have been
adjusted retroactively for the ten-to-one Reverse Stock Split.
F-19
<PAGE> 69
CHINA RESOURCES DEVELOPMENT INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share and per share data)
13. SHARE CAPITAL (continued)
On December 31, 1996, the Board of Directors adopted a resolution
providing for the amendment to the designation and terms of its 2,500
shares of authorized preferred stock previously designated as series B
convertible preferred stock. The certificate of designation of the
series B convertible preferred stock was amended and the stock was
redesignated as series B preferred stock, which is no longer
convertible. The authorized number of series B preferred stock has
also been increased to 3,200,000 shares. Immediate before the
redesignation, no shares of the series B convertible preferred stock
were outstanding.
The series B preferred stock entitles the holder to voting rights
which are the same as the common stock of the Company. The shares of
series B preferred stock have no rights to dividends or to
distributions upon liquidation or dissolution of the Company and have
limitations as to future registration.
On December 31, 1996, the Company entered into another exchange
agreement with the holder of the Restricted Common Stock whereby
3,200,000 shares of the Restricted Common Stock, after adjusting for
the Reverse Stock Split in 1996, were exchanged on an one-for-one
basis to 3,200,000 shares of series B preferred stock which have
restrictions that are the same or more stringent than the Restricted
Common Stock. Unlike the Restricted Common Stock, the restrictions on
participation of dividends and distributions on dissolution will not
lapse through the passage of time.
14. 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, 240,000 shares of common stock of the Company, after
adjusting for the Reverse Stock Split in 1996, were permitted to 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$37.8 (RMB314.50) per share
(the fair market value of the common stock as of July 1, 1995), after
adjusting for the Reverse Stock Split in 1996, and are exercisable
from July 1, 1996 to July 1, 2005. On May 20, 1996, pursuant to an
Unanimous Written Consent of the committee appointed pursuant to the
Plan and a resolution of a special meeting of the Board of Directors
of the Company, the exercise price was changed to US$4.20 (RMB34.86)
per share (the fair market value of the common stock as of May 20,
1996), after adjusting for the Reserve Stock Split in 1996. By virtue
of that action, the outstanding options are now exercisable beginning
on May 20, 1997 and until May 20, 2006. All stock options remained
outstanding at the date of preparation of these financial statements.
On December 30, 1996, a shareholders' meeting was held authorizing an
amendment of the Plan increasing the number of common stock issuable
under the Plan to 20% of the Company's outstanding common stock, as
determined at the time of granting the stock options. Such shares may
represent authorized but unissued shares as well as repurchased or
forfeited shares for any grant under the Plan that was expired or
unexercised. Further amendments were made to give the Board of
Directors the ability to set a holding period of less than one year
for non-qualified stock options.
F-20
<PAGE> 70
CHINA RESOURCES DEVELOPMENT INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share and per share data)
14. STOCK OPTIONS (continued)
The Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and
related Interpretations in accounting for its stock options because,
as discussed below, the alternative fair value accounting provided for
under Financial Accounting Standards Board Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("FASB 123"), requires use of option valuation models
that were not developed for use in valuing employee stock options.
Under APB 25, because the exercise price of the Company's stock
options equals the market price of the underlying stock on the date of
grant, no compensation expense is recognized.
Pro forma information regarding net income and earnings per share is
required by FASB 123, and has been determined as if the Company had
accounted for its stock options under the fair value method of that
Statement. The fair value for these options was estimated at the date
of grant using a Black-Scholes option pricing model with the following
weighted-average assumptions for 1995 and 1996, respectively:
risk-free interest rates of 6.50% and 6.78%; no dividend yield;
volatility factors of the expected market price of the Company's
common stock of 141.38% and 42.13%; and a weighted-average expected
life of the option of 6 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including
the expected stock price volatility. Because the Company's stock
options have characteristics significantly different from those of
traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its stock options.
For the purposes of pro forma disclosures, the estimated fair value of
the options is amortized to expense over the options' vesting period.
The Company's pro forma information is as follows:
<TABLE>
<CAPTION>
Year ended December 31,
Note 1995 1996
-------------------------
RMB RMB
<S> <C> <C> <C>
Pro forma net income 15,669 28,566
Pro forma earnings per share - Primary 3(j) 12.71 7.61
</TABLE>
F-21
<PAGE> 71
CHINA RESOURCES DEVELOPMENT INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share and per share data)
15. RELATED PARTY BALANCES AND TRANSACTIONS
The Group's amounts due from/to Farming Bureau and farms (the "Farms")
and other related companies owned and/or controlled by the Farming
Bureau comprise:
<TABLE>
<CAPTION>
December 31,
1995 1996
------------------------------
RMB RMB
<S> <C> <C>
Due from related companies:
Deposits paid to Farms and other related
companies for the purchase of natural
rubber (note 15(b)) 262,104 -
Farms 9,395 52,300
Jin Long Corporation ("Jin Long") 5,657 50,562
Jin Huan Corporation ("Jin Huan") 5,134 44,359
Other related companies 6,213 -
------- -------
288,503 147,221
======= =======
Due to related companies:
Farms 13,634 -
Other related companies 9,020 -
------- -------
22,654 -
======= =======
Due from Farming Bureau:
Deposits for the purchase of natural rubber
(note 15(b)) - 229,372
Others 80,427 58,589
------- -------
80,427 287,961
======= =======
</TABLE>
In 1996, pursuant to a restructuring defined hereinafter, deposits paid to Farms
and other related companies for the purchase of natural rubber were transferred
to the Farming Bureau.
F-22
<PAGE> 72
CHINA RESOURCES DEVELOPMENT INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share and per share data)
15. 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 at the balance sheet date were summarized
as follows:
<TABLE>
<CAPTION>
December 31,
1995 1996
------------------------------------------
RMB RMB
<S> <C> <C>
Due from related companies:
Deposits paid to Farms and other
related companies for the
purchase of natural rubber Interest-free Interest-free
Farms 18.25% Interest-free
Jin Long 18.25% Interest-free
Jin Huan 18.25% plus rental Interest-free
income from
certain
properties owned
by Jin Huan
Other related companies Interest-free, N/A
except for
RMB3,350 at
Due to related companies:
Farms Interest-free N/A
except for
RMB3,500 at 18.00%
Other related companies Interest-free N/A
Due from Farming Bureau:
Deposits for the purchase of natural rubber N/A Interest-free
Others 18.25% Interest-free
Due to shareholders 10.23% Interest-free
</TABLE>
In connection with a restructuring defined hereinafter and effective
from October 1, 1996, amounts due from the Farming Bureau and related
companies have become interest-free (note 15(n)).
The deposits paid for the purchase of natural rubber will be set off
against the future receipt of natural rubber.
F-23
<PAGE> 73
CHINA RESOURCES DEVELOPMENT INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share and per share data)
15. RELATED PARTY BALANCES AND TRANSACTIONS (continued)
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. 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, as well as with shareholders of the Company,
which were summarized as follows:
(a) Sales of rubber products and procurement of materials and
supplies
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 of natural rubber
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.
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 with related companies or the Farming Bureau 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.
F-24
<PAGE> 74
CHINA RESOURCES DEVELOPMENT INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share and per share data)
15. RELATED PARTY BALANCES AND TRANSACTIONS (continued)
(b) Sales and purchases of natural rubber (continued)
Purchase and sales transactions with the Farms and other
related companies were as follows:
<TABLE>
<CAPTION>
Year ended December 31,
1994 1995 1996
------------------------------------
RMB RMB RMB
<S> <C> <C> <C>
Purchases of natural rubber from
the Farms and other related 855,805 1,652,707 1,438,420
companies Sales of goods to the 28,893 88,564 12,876
Farms
Sales of goods to other related
companies 31,474 19,158 46,302
======= ========= =========
</TABLE>
(c) Interest income and expenses
<TABLE>
<CAPTION>
Year ended December 31,
1994 1995 1996
---------------------------------
RMB RMB RMB
<S> <C> <C> <C>
Interest income and rental in
lieu of interest received from:
Farming Bureau -- 5,596 12,382
Related companies 20,311 8,953 12,920
------- --------- ---------
20,311 14,549 25,302
======= ========= =========
Interest expenses paid to:
Farming Bureau 69 679 --
Shareholders of the Company 167 1,378 271
------- --------- ---------
236 2,057 271
======= ========= =========
</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, 1996 were RMB1,580 (1995: RMB1,591 and
1994: RMB975).
F-25
<PAGE> 75
CHINA RESOURCES DEVELOPMENT INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share and per share data)
15. RELATED PARTY BALANCES AND TRANSACTIONS (continued)
(e) Transfers of assets
<TABLE>
<CAPTION>
Year ended December 31,
1994 1995 1996
-------------------------------
RMB RMB RMB
<S> <C> <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 --
Transfer of assets and
liabilities to the Farming
Bureau pursuant to the
Restructuring (as defined in
note 15(n) hereinafter), net -- -- 227,950
======= ========= =========
</TABLE>
(f) Acquisition agreements
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.
F-26
<PAGE> 76
CHINA RESOURCES DEVELOPMENT INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share and per share data)
15. 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% 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. For the year ended December 31, 1996,
RMB5,000, being the maximum amount under the agreement, was
payable to the Farming Bureau. For the year ended December
31, 1994 and 1995 no service fee was paid to the Farming
Bureau as the above-mentioned condition was not met in both
periods.
(i) Rental agreements with the Farming Bureau and a related
company
On July 15, 1994, Hainan Agricultural entered into a rental
agreement with the Farming Bureau for the leasing of a
portion of a building located in Hainan, the PRC commencing
on 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.
On August 9, 1996, Hainan Agricultural entered into another
rental agreement with a company controlled by the Farming
Bureau for the lease of a portion of a building located in
Hainan, the PRC commencing on October 1, 1996. The rental
agreement is for a period of 8 years at an annual rental of
RMB72 for the first 4 years and to be negotiated by the two
parties for the remaining 4 years. Rental is payable in equal
semi-annual instalments.
For the year ended December 31, 1996, rental charges of
RMB188 were paid to the Farming Bureau and the related
company (1995: RMB170 and 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 years ended December 31, 1994, 1995 and
1996, consultancy fees of HK$880 (RMB979), HK$1,680
(RMB1,815) and HK$2,040 (RMB2,193) were paid to Brender,
respectively.
F-27
<PAGE> 77
CHINA RESOURCES DEVELOPMENT INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share and per share data)
15. RELATED PARTY BALANCES AND TRANSACTIONS (continued)
(k) Management fees income from Jin Long and Jin Huan
For the year ended December 31, 1996, management fees of
RMB3,000 (1995: RMB3,000 and 1994: Nil) 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 RMB3,451 for the year ended December
31, 1996 (1995: RMB4,424 and 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.
(n) Restructuring of operations
In the third quarter of 1996, the Group initiated a plan to
restructure its operations in Hainan, the PRC (the
"Restructuring"). Pursuant to a Shareholders' Agreement on
Business Restructuring (the "Restructuring Agreement"), the
operations of Hainan Agricultural, First Supply and Second
Supply (collectively, the "Operating Subsidiaries") were
restructured effective from October 1, 1996. The
Restructuring has resulted in the simplification of corporate
structure by consolidating the operations of several trading
and servicing divisions and the transfer of certain assets,
liabilities, including certain amounts due from the Farms and
other related companies of the Farming Bureau, and surplus
employees to the Farming Bureau, a 39% shareholder of Hainan
Agricultural. In addition, as part of the Restructuring, bank
loans of the Operating Subsidiaries will be transferred to
the Farming Bureau once the proper approval has been obtained
from the relevant banks (note 25). Despite the downsizing of
several operations, the Restructuring has not resulted in the
discontinuance of any line of businesses as all the
operations have been taken up by the remaining divisions.
Pursuant to an Asset and Staff Transfer Agreement (the
"Transfer Agreement"), the value of the assets and
liabilities transferred was determined based on their fair
value at the effective date of transfer as determined by a
professional independent valuer in the PRC. Based on their
valuation, there are no material differences between the fair
value and the carrying values (as determined under US GAAP)
of those assets and liabilities transferred. The Farming
Bureau has endeavored to take over all the transferred
employees and arrangements have been made with an insurance
company controlled by the Farming Bureau to transfer the
retirement plan (note 23) of those employees to the Farming
Bureau.
F-28
<PAGE> 78
CHINA RESOURCES DEVELOPMENT INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share and per share data)
15. RELATED PARTY BALANCES AND TRANSACTIONS (continued)
(n) Restructuring of operations (continued)
Based on the valuation by the independent valuer, the fair
value of assets/liabilities of the Operating Subsidiaries,
excluding bank loans of RMB292,560, that were transferred to
the Farming Bureau are as follows:
<TABLE>
<CAPTION>
RMB
<S> <C>
Trade receivables 92,553
Other receivables, prepayments and other current assets 42,665
Inventories 27,986
Amounts due from related companies 274,046
Fixed assets 15,821
Investments 1,961
Amounts due to related companies ( 127,458)
Accounts payable ( 61,689)
Other payables and accrued liabilities ( 37,935)
---------
227,950
=========
</TABLE>
Pursuant to the Transfer Agreement, a net liability of
RMB64,610, including short-term bank loans of the Group of
RMB292,560 will be transferred to the Farming Bureau upon the
effective transfer of the bank loans and the amount would be
used to reduce the amount due from the Farming Bureau and
other related companies. As at December 31, 1996 and before
the transfer of bank loans, assets and liabilities with a net
asset value of RMB227,950 were transferred to the Farming
Bureau.
In connection with the Restructuring and effective from
October 1, 1996, amounts due from the Farming Bureau and
other related companies owned and/or controlled by the
Farming Bureau have become interest-free. Starting from
October 1, 1996, interest expense on bank loans of the Group
have been borne by the Farming Bureau until the effective
transfer of the bank loans to the Farming Bureau.
(o) Exchange of series A preferred stock to Restricted Common
Stock and exchange of Restricted Common Stock to series B
preferred stock
As at the dates of the respective exchanges, two directors of
the Company are also directors of the holder of series A
preferred stock and Restricted Common Stock, respectively.
F-29
<PAGE> 79
CHINA RESOURCES DEVELOPMENT INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share and per share data)
15. RELATED PARTY BALANCES AND TRANSACTIONS (continued)
(p) Loan from the Farming Bureau
On March 25, 1996, Hainan Agricultural entered into a loan
agreement with the Farming Bureau by which Hainan
Agricultural by which Hainan Agricultural borrowed RMB35,868.
The loan is unsecured, interest-free and it is expected to be
repaid by conversion of the loan into registered capital of
Hainan Agricultural upon the approval for such conversion by
relevant government authorities.
On December 31, 1996, a supplementary agreement was entered
into between Hainan Agricultural and the Farming Bureau by
which a new article was added to impose a right of set-off
against the loan or any additional loan made by the Farming
Bureau to Hainan Agricultural against any amounts due to
Hainan Agricultural, its subsidiary companies and/or
affiliates.
16. 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>
<CAPTION>
RMB
<S> <C>
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.
F-30
<PAGE> 80
CHINA RESOURCES DEVELOPMENT INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share and per share data)
16. 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, 1994 are as follows:
<TABLE>
<CAPTION>
Year ended
December 31,
1994
RMB
(Unaudited)
<S> <C>
Sales 1,754,288
Sales taxes -
-------------
Net sales 1,754,288
Cost of sales ( 1,686,944)
Depreciation of fixed assets ( 1,981)
Selling and administrative expenses ( 39,403)
-------------
Operating income 25,960
Financial income, net 9,613
Other income 8,216
Reorganization expenses -
-------------
Income before income taxes 43,789
Income taxes ( 6,564)
-------------
Income before minority interests 37,225
Minority interests ( 16,341)
-------------
Net income 20,884
=============
Pro forma earnings per share, based on 1,200,000
shares of the Company's common stock as adjusted
for the ten-to-one Reverse Stock Split 17.40
=============
</TABLE>
F-31
<PAGE> 81
CHINA RESOURCES DEVELOPMENT INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share and per share data)
17. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Year ended December 31,
1994 1995 1996
-----------------------------
RMB RMB RMB
<S> <C> <C> <C>
Cash paid during the year for:
Interest expenses 25,321 49,963 28,258
Income tax -- 307 7,193
====== ====== =======
Non-cash investing and financing activities:
Series A preferred stock issued for
conversion of long term loans
from shareholders -- 53,930 --
Conversion of 1,653 shares of
series B convertible preferred stock
to 4,579,052 shares of common stock -- -- 383
Exchange of 6,400,000 shares of
Series A preferred stock for
3,200,000 shares of Restricted
Common Stock -- -- 53,930
Exchange of 3,200,000 shares of
Restricted Common Stock for
3,200,000 shares of Series B
preferred stock -- -- 270
Transfer of assets and liabilities to the
Farming Bureau pursuant to the
Restructuring (note 15(n)), net -- -- 227,950
====== ====== =======
</TABLE>
F-32
<PAGE> 82
CHINA RESOURCES DEVELOPMENT INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share and per share data)
18. 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 the 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.
Current vulnerability due to certain concentrations:
The Group's operating assets and primary source of income and cash
flows 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 18 years, no assurance can be given that the PRC
government will continue to pursue such policies or that such policies
may not be significantly altered, especially in the event of a change
in leadership, social or political disruption or unforeseen
circumstances affecting the PRC's political, economic and social life.
There is also no guarantee that the PRC government's pursuit of
economic reforms will be consistent or effective.
F-33
<PAGE> 83
CHINA RESOURCES DEVELOPMENT INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share and per share data)
18. CONCENTRATION OF RISK (continued)
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 assurances 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 comes 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.
19. 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.
F-34
<PAGE> 84
CHINA RESOURCES DEVELOPMENT INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share and per share data)
19. FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
(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 RMB11,963 and RMB12,344 at December 31, 1995 and
1996, 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.
20. 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 years ended
December 31, 1994, 1995 and 1996 were RMB1,328, RMB3,137 and RMB4,409,
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 years ended December 31, 1994, 1995 and 1996 were RMB1,329,
RMB3,136 and RMB4,409, 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
amounts of retained earnings of Hainan Agricultural and its
subsidiaries that are included on the consolidated balance sheets as
of December 31, 1994, 1995 and 1996 that are available for
distribution are RMB10,626, RMB27,844 and RMB62,951, respectively.
F-35
<PAGE> 85
CHINA RESOURCES DEVELOPMENT INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share and per share data)
21. COMMITMENTS AND CONTINGENCIES
(a) Lease commitments
Future minimum payments under operating leases for the
leasing of buildings at December 31, 1996 were as follows:
<TABLE>
<CAPTION>
RMB
<S> <C>
1997 242
1998 242
1999 242
2000 242
2001 242
Thereafter 684
-----
Total minimum lease payments 1,894
=====
</TABLE>
Rental expenses under operating leases for the years ended
December 31, 1994, 1995 and 1996 amounted to RMB43, RMB170
and RMB188, respectively.
(b) Futures contracts
As of December 31, 1996, the Group had open short positions
in respect of its natural rubber commodity futures contracts,
maturing through 1997, with a notional value of RMB30,497
(1995: RMB119,670).
F-36
<PAGE> 86
CHINA RESOURCES DEVELOPMENT INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share and per share data)
22. 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 Rates at December 31, 1994, 1995 and 1996 were
US$1 : RMB8.45, US$1 : RMB8.32 and US$1 : RMB8.30, respectively.
23. 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"). 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. All staff of First Supply and Second Supply are covered under
the Retirement Plan and upon retirement, the retired staff are
entitled to a monthly pension payment borne by the above-mentioned
insurance company under the Retirement Plan. First Supply and Second
Supply are not responsible for any payments beyond the contributions
to the Retirement Plan as noted above.
The amounts of contributions paid by First Supply and Second Supply,
which were charged to the consolidated statements of income, amounted
to RMB975, RMB1,591 and RMB1,588 for the years ended December 31,
1994, 1995 and 1996, respectively.
F-37
<PAGE> 87
CHINA RESOURCES DEVELOPMENT INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share and per share data)
24. SEGMENT FINANCIAL INFORMATION
The Group is principally engaged in the distribution of natural rubber
and the procurement of materials, supplies and other agricultural
products in the PRC.
The Group did not engage in any export sales during the years ended
December 31, 1994, 1995 and 1996.
Business segment
Reportable information on the Group's segments are as follows:
<TABLE>
<CAPTION>
Year ended December 31,
1994 1995 1996
-------------------------------------
RMB RMB RMB
<S> <C> <C> <C>
Net sales:
Distribution of natural rubber:
Net sales to unaffiliated customers 1,199,691 1,776,641 1,519,060
Net sales to affiliates 27,366 1,630 --
--------- --------- ---------
1,227,057 1,778,271 1,519,060
--------- --------- ---------
Procurement of materials, supplies
and other agricultural products:
Net sales to unaffiliated customers 48,190 72,880 102,745
Net sales to affiliates 33,001 106,092 205,694
--------- --------- ---------
81,191 178,972 308,439
--------- --------- ---------
Total net sales 1,308,248 1,957,243 1,827,499
========= ========= =========
</TABLE>
F-38
<PAGE> 88
CHINA RESOURCES DEVELOPMENT INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share and per share data)
24. SEGMENT FINANCIAL INFORMATION (continued)
Business segment (continued)
<TABLE>
<CAPTION>
Year ended December 31,
1994 1995 1996
-------------------------------------
RMB RMB RMB
<S> <C> <C> <C>
Operating income:
Distribution of natural rubber 17,538 47,188 40,460
Procurement of materials, supplies and
other agricultural products 1,645 1,607 57,682
------- ------ ------
Total operating income 19,183 48,795 98,142
======= ====== ======
Depreciation:
Distribution of natural rubber 841 2,562 1,066
Procurement of materials, supplies and
other agricultural products 288 258 747
------- ------ ------
Total depreciation expenses 1,129 2,820 1,813
======= ====== ======
Capital expenditures:
Distribution of natural rubber -- -- --
Procurement of materials, supplies and
other agricultural products 7,179 4,275 2,663
------- ------ ------
Total capital expenditures 7,179 4,275 2,663
======= ====== ======
<CAPTION>
Year ended December 31,
1994 1995 1996
-------------------------------------
RMB RMB RMB
<S> <C> <C> <C>
Identifiable assets:
Distribution of natural rubber 223,203 435,664 552,606
Procurement of materials, supplies and
other agricultural products 308,998 231,748 151,458
------- ------- -------
Total identifiable assets 532,201 667,412 704,064
Goodwill 1,104 1,076 1,049
------- ------- -------
Total assets 533,305 668,488 705,113
======= ======= =======
</TABLE>
F-39
<PAGE> 89
CHINA RESOURCES DEVELOPMENT INC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share and per share data)
25. SUBSEQUENT EVENT
On March 28, 1997 and March 31, 1997, the Operating Subsidiaries
obtained approvals from the relevant banks for the transfer of bank
loans with a total amount of RMB292,560 to the Farming Bureau pursuant
to the Restructuring.
26. COMPARATIVE AMOUNTS
Certain comparative amounts have been reclassified to conform with the
current year's presentation.
F-40
<PAGE> 90
EXHIBITS INDEX
<TABLE>
<CAPTION>
Exhibit No. Exhibit Description
----------- -------------------
<S> <C>
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.)
3.6 Certificate of Amendment of Articles of Incorporation of the
Registrant, effective December 30, 1996 (Filed herewith.)
3.7 Amended and Restated By-laws of the Registrant, as amended on
December 30, 1996 (Filed herewith.)
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.)
4.2 Certificate of Amendment of Certificate of Designation of
Series B Convertible Preferred Stock, effective December 31,
1996 (Filed herewith.)
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
</TABLE>
<PAGE> 91
<TABLE>
<S> <C>
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 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.)
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.)
</TABLE>
<PAGE> 92
<TABLE>
<S> <C>
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.)
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 with
Annual Report on Form 10-K for the fiscal year ended December
31, 1995, and incorporated herein by reference.)
</TABLE>
<PAGE> 93
<TABLE>
<CAPTION>
<S> <C>
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 with
Annual Report on Form 10-K for the fiscal year ended December
31, 1995, and incorporated herein by reference.)
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
with Annual Report on Form 10-K for the fiscal year ended
December 31, 1995, and incorporated herein by reference.)
10.24 Employment Agreement between Billion Luck and Han Jian Zhun,
dated August 1, 1995 (Filed with Annual Report on Form 10-K
for the fiscal year ended December 31, 1995, and incorporated
herein by reference.)
10.25 Employment Agreement between Billion Luck and Li Fei Lie,
dated August 1, 1995 (Filed with Annual Report on Form 10-K
for the fiscal year ended December 31, 1995, and incorporated
herein by reference.)
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 with
Annual Report on Form 10-K for the fiscal year ended December
31, 1995, and incorporated herein by reference.)
10.27 Exchange Agreement, by and between the Registrant and
Everbright Finance & Investment Co. Limited, dated July 22,
1996 (Filed with Quarterly Report on Form 10-Q for the fiscal
quarter ended September 30, 1996, and incorporated herein by
reference.)
10.28 Loan Agreement between HARC and the Farming Bureau, dated
March 25, 1996, and the supplementary agreement dated December
31, 1996 (Certified English translation of original Chinese
version filed herewith.)
10.29 Loan Agreement between HARC and the Registrant, dated March
25, 1996 (Certified English translation of original Chinese
version filed herewith.)
10.30 Rental Agreement between HARC and the Hainan Farming Bureau
Testing Center, dated August 9, 1996 (Certified English translation
of original Chinese version filed herewith.)
10.31 Shareholders' Agreement on Business Restructuring among the
Farming Bureau, Guilinyang Farm and Billion Luck, dated as of
October 1, 1996 (Certified English translation of original Chinese
version filed herewith.)
10.32 Assets and Staff Transfer Agreement among the Farming Bureau,
HARC, First Supply and Second Supply, dated as of October 1,
1996 (Certified English translation of original Chinese
version filed herewith.)
10.33 Exchange Agreement, by and between the Registrant and
Everbright Finance & Investment Co. Limited, dated December
31, 1996 (Filed herewith.)
10.34 China Resources Development, Inc., Amended and Restated 1995
Stock Option Plan, as amended on December 30, 1996 (Filed
herewith.)
11.3 Computation of Earnings Per Share for Fiscal Year ended
December 31, 1996 (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.)
</TABLE>
<PAGE> 94
<TABLE>
<S> <C>
21 Subsidiaries of the Registrant (Contained in Financial
Statements filed herewith.)
27.4 Financial Data Schedule (Filed herewith. For SEC use only.)
99.4 Notice of Annual Meeting, Proxy Statement and Proxy
distributed to shareholders in advance of annual meeting held
on December 30, 1996 (Filed with Schedule 14A dated December
20, 1996, and incorporated herein by reference.)
</TABLE>
<PAGE> 1
EXHIBIT 3.6
Certificate of Amendment of Articles of Incorporation of the
Registrant, effective December 30, 1996
<PAGE> 2
CERTIFICATE OF AMENDMENT
OF
ARTICLES OF INCORPORATION
OF
CHINA RESOURCES DEVELOPMENT, INC.
We, the undersigned President and Secretary of China Resources
Development, Inc. (the "Corporation"), in accordance with NRS 73.390, do hereby
certify the following:
1. The Board of Directors of the Corporation, at a special meeting held
on November 29, 1996, adopted resolutions to amend the Corporation's Articles of
Incorporation, as such Articles of Incorporation have been amended from time to
time, as follows:
(a) Article V of the Articles of Incorporation is hereby
deleted in its entirety and restated as follows:
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 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.
(b) Article VIII of the Articles of Incorporation is hereby
amended to add the following sentences to the beginning of Article VIII:
BOARD OF DIRECTORS: The number of directors of the
corporation shall be a minimum of three and the 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
<PAGE> 3
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.
(c) The provisions of Article IX designated "OFFICERS",
"ELECTION" and "TERM OF OFFICE" are each hereby deleted in their entirety and
restated as follows:
OFFICERS: The officers of the corporation shall
consist of a Chairman of the Board of Directors, a President,
a Vice President, a Secretary, 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 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, Treasurer or Chief Financial Officer and
Financial Controller.
TERM OF OFFICE: The term of office of directors shall
be as forth in Article VIII, and the term of office of all
officers shall be 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.
All provisions of Article IX, other than those specifically addressed in
paragraph 3 above, shall remain as part of Article IX in their entirety.
2. The number of shares of stock of the Corporation which are
outstanding and entitled to vote on an amendment to the Articles of
Incorporation is Eleven Million Nine Hundred Ninety-
-2-
<PAGE> 4
Nine Thousand Four Hundred and Eighteen (11,999,418) shares of Common Stock.
3. The said changes and amendments set forth herein have been consented
to and approved by a vote of the stockholders holding at a majority of each
class of stock outstanding and entitled to vote thereon.
IN WITNESS WHEREOF, the undersigned President and Secretary of the
Corporation have executed this Certificate of Amendment of Articles of
Incorporation this 31st day of January, 1997.
/s/ Li Shunxing
--------------------------------------------
Li Shunxing, President
/s/ Zhang Yibing
--------------------------------------------
Zhang Yibing, Secretary
Signatures verified by:
/s/ Dominic Yiu Kuen Lai
- ----------------------------------
Print Name: DOMINIC YIU KUEN LAI
-----------------------
Notary Public
Hong Kong
[SEAL]
-3-
<PAGE> 1
EXHIBIT 3.7
Amended and Restated By-laws of the Registrant, as amended on December
30, 1996
<PAGE> 2
AMENDED AND RESTATED
BY-LAWS
OF
CHINA RESOURCES DEVELOPMENT, INC.
ARTICLE I. - OFFICES
The office of the Corporation shall be located in any City
and State designated by the Board of Directors. The Corporation may also
maintain other offices at such other places within or without the United States
as the Board of Directors may, from time to time, determine.
ARTICLE II. - STOCKHOLDERS
1. ANNUAL MEETING.
The annual meeting of the stockholders shall be held if
called by the Board of Directors within five months after the close of the
fiscal year of the Corporation, for the purpose of electing directors, and
transacting such other business as may properly come before the meeting.
2. SPECIAL MEETINGS.
Special meetings of the stockholders, for any purpose or
purposes, unless otherwise prescribed by statute, may be called by the
president or by the directors, and shall be called by the president at the
request of the holders of not less than ten percent of all the outstanding
shares of the corporation entitled to vote at the meeting.
3. PLACE OF MEETING
The directors may designate any place, either within or
without the State unless otherwise prescribed by statute, as the place of
meeting for any annual meeting or for any special meeting called by the
directors. A waiver of notice signed by all stockholders entitled to vote at a
meeting may designate any place, either within or without the state unless
otherwise prescribed by statute, as the place for holding such meeting. If no
designation is made, or if a special meeting be otherwise called, the place of
meeting shall be the principal office of the corporation.
4. NOTICE OF MEETING
Written or printed notice stating the place, day and hour of
the meeting and, in case of a special meeting, the purpose or purposes for
which the meeting is called, shall be delivered not less than 10 nor more than
fifty 50 days before the date of the meeting, either personally or by mail, by
or at the direction of
<PAGE> 3
the president, or the secretary, or the officer or persons calling the meeting,
to each stockholder of record entitled to vote at such meeting. If mailed, such
notice shall be deemed to be delivered when deposited in the United States
mail, addressed to the stockholder at his address as it appears on the stock
transfer books of the corporation, with postage thereon prepaid.
5. CLOSING OF TRANSFER BOOKS OR FIXING OF RECORD DATE.
For the purpose of determining stockholders entitled to
notice of or to vote at any meeting of stockholders or any adjournment thereof,
or stockholders entitled to receive payment of any dividend, or in order to
make a determination of stockholders for any other proper purpose, the
directors of the corporation may provide that the stock transfer books shall be
closed for a stated period but not to exceed, in any case, 30 days. If the
stock transfer books shall be closed for the purpose of determining
stockholders entitled to notice of or to vote at a meeting of stockholders,
such books shall be closed for at least 15 days immediately preceding such
meeting. In lieu of closing the stock transfer books, the directors may fix in
advance a date as the record date for any such determination of stockholders,
such date in any case to be not more than 45 days and, in case of a meeting of
stockholders, not less than 15 days prior to the date on which the particular
action requiring such determination of stockholders is to be taken. If the
stock transfer books are not closed and no record date is fixed for the
determination of stockholders entitled to notice of or to vote at a meeting of
stockholders, or stockholders entitled to receive payment of a dividend, the
date on which notice of the meeting is mailed or the date on which the
resolution of the directors declaring such dividend is adopted, as the case may
be, shall be the record date for such determination of stockholders. When a
determination of stockholders entitled to vote at any meeting of stockholders
has been made as provided in this section, such determination shall apply to
any adjournment thereof.
6. QUORUM.
At any meeting of stockholders 50% of the outstanding shares
of the corporation entitled to vote, represented in person or by proxy, shall
constitute a quorum at a meeting of stockholders. If less than said number of
the outstanding shares are represented at a meeting, a majority of the shares
so represented may adjourn the meeting from time to time without further
notice. At such adjourned meeting at which a quorum shall be present or
represented, any business may be transacted which might have been transacted at
the meeting as originally notified. The stockholders present at a duly
organized meeting may continue to transact business until adjournment,
notwithstanding the withdrawal of enough stockholders to leave less than a
quorum.
-2-
<PAGE> 4
7. PROXIES.
At all meetings of stockholders, a stockholder may vote by
proxy executed in writing by the stockholder or by his duly authorized attorney
in fact. Such proxy shall be filed with the secretary of the corporation before
or at the time of the meeting.
8. VOTING
Each stockholder entitled to vote in accordance with the
terms and provisions of the certificate of incorporation and these by-laws
shall be entitled to one vote, in person or by proxy, for each share of stock
entitled to vote held by such stockholders. Upon the demand of any stockholder,
the vote for directors and upon any question before the meeting shall be by
ballot. All elections for directors shall be decided by majority vote; all
other questions shall be decided by majority vote except as otherwise provided
by the Certificate of Incorporation or the laws of this State.
ARTICLE III. - BOARD OF DIRECTORS
1. GENERAL POWERS.
The business and affairs of the corporation shall be managed
by its board of directors. The directors shall in all cases act as a board, and
they may adopt such rules and regulations for the conduct of their meetings and
the management of the corporation, as they may deem proper, not inconsistent
with these by-laws and the laws of this State.
2. NUMBER, TENURE AND QUALIFICATIONS.
The number of directors of the corporation shall be a minimum
of three and a maximum of twenty-five. Each director shall hold office until
the next annual meeting of stockholders and until his successor shall have been
elected and qualified.
3. REGULAR MEETINGS.
A regular meeting of the directors, shall be held without
other notice than this by-law immediately after, and at the same place as, the
annual meeting of stockholders. The directors may provide, by resolution, the
time and place for the holding of additional regular meetings without other
notice than such resolution.
4. SPECIAL MEETINGS.
Special meetings of the directors may be called by or at
the request of the president or any two directors. The person or
persons authorized to call special meetings of the directors may
-3-
<PAGE> 5
fix the place for holding any special meeting of the directors
called by them.
5. NOTICE
Notice of any special meeting shall be given at least 5 days
previously thereto by written notice delivered personally, or by telegram or
mailed to each director at his business address. If mailed, such notice shall
be deemed to be delivered when deposited in the United States mail so
addressed, with postage thereon prepaid. If notice be given by telegram, such
notice shall be deemed to be delivered when the telegram is delivered to the
telegraph company. The attendance of a director at a meeting shall constitute a
waiver of notice of such meeting, except wherein a director attends a meeting
for the express purpose of objecting to the transaction of any business because
the meeting is not lawfully called or convened.
6. QUORUM
At any meeting of the directors a majority of the directors
shall constitute a quorum for the transaction of business, but if less than
said number is present at a meeting, a majority of the directors present may
adjourn the meeting from time to time without further notice.
7. MANNER OF ACTING
The act of the majority of the directors present at a meeting
at which a quorum is present shall be the act of the directors.
8. NEWLY CREATED DIRECTORSHIPS AND VACANCIES.
Newly created directorships resulting from an increase in the
number of directors and vacancies occurring in the board for any reason except
the removal of directors without cause may be filled by a vote of a majority of
the directors then in office, although less than a quorum exits. Vacancies
occurring by reason of the removal of directors without cause shall be filled
by vote of the stockholders. A director elected to fill a vacancy caused by
resignation, death or removal shall be elected to hold office for the unexpired
term of his predecessor.
9. REMOVAL OF DIRECTORS
Any or all of the directors may be removed for cause by vote
of the stockholders or by action of the board. Directors may be removed without
cause only by vote of the stockholders.
-4-
<PAGE> 6
10. RESIGNATION
A director may resign at any time by giving written notice to
the board, the president or the secretary of the corporation. Unless otherwise
specified in the notice, the resignation shall take effect upon receipt thereof
by the board or such officer, and the acceptance of the resignation shall not
be necessary to make it effective.
11. COMPENSATION
No compensation shall be paid to directors, as such, for
their services, by resolution of the board a fixed sum and expenses for actual
attendance at each regular or special meeting of the board may be authorized.
Nothing herein contained shall be construed to preclude any director from
serving the corporation in any other capacity and receiving compensation
therefor.
12. PRESUMPTION OF ASSENT
A director of the corporation who is present at a meeting of
the directors at which action on any corporate matter is taken shall be
presumed to have assented to the action taken unless his dissent shall be
entered in the minutes of the meeting or unless he shall file his written
dissent to such action with the person acting as the secretary of the meeting
before the adjournment thereof or shall forward such dissent by registered mail
to the secretary of the corporation immediately after the adjournment of the
meeting. Such right to dissent shall not apply to a director who voted in favor
of such action.
13. EXECUTIVE AND OTHER COMMITTEES
The board, by resolution, may designate from among its
members an executive committee and other committees, each consisting of three
or more directors. Each such committee shall serve at the pleasure of the
board.
ARTICLE IV. - OFFICERS
1. NUMBER
The officers of the corporation shall be a president, a
vice-president, a secretary and a treasurer, each of whom shall be elected by
the directors. Such other officers and assistant officers as may be deemed
necessary may be elected or appointed by the directors. Any two or more offices
may be held by the same person.
-5-
<PAGE> 7
2. ELECTION AND TERM OF OFFICE
The officers of the corporation to be elected by the
directors shall be elected at a meeting of the directors held when determined
by the directors. Each officer shall hold office until his successor shall have
been duly elected and shall have qualified or until his death or until he shall
resign or shall have been removed in the manner hereinafter provided.
3. REMOVAL
Any officer or agent elected or appointed by the directors
may be removed by the directors whenever in their judgment the best interests
of the corporation would be served thereby, but such removal shall be without
prejudice to the contract rights, if any, of the person so removed.
4. VACANCIES
A vacancy in any office because of death, resignation,
removal, disqualification or otherwise, may be filled by the directors for the
unexpired portion of the term.
5. SALARIES
The salaries of the officers shall be fixed from time to time
by the directors and no officer shall be prevented from receiving such salary
by reason of the fact that he is also a director of the corporation.
ARTICLE V. - CONTRACTS, LOANS, CHECK AND DEPOSITS
1. CONTRACTS
The directors may authorize any officer or officers, agent or
agents, to enter into any contract or execute and deliver any instrument in the
name of and on behalf of the corporation, and such authority may be general or
confined to specific instances.
2. LOANS
No loans shall be contracted on behalf of the corporation and
no evidences of indebtedness shall be issued in its name unless authorized by a
resolution of the directors. Such authority may be general or confined to
specific instances.
3. CHECKS, DRAFTS, ETC.
All checks, drafts or other orders for the payment of money,
notes or other evidences of indebtedness issued in the name of the corporation,
shall be signed by such officer or officers,
-6-
<PAGE> 8
agent or agents of the corporation and in such manner as shall from time to
time be determined by resolution of the directors.
4. DEPOSITS
All funds of the corporation not otherwise employed shall be
deposited from time to time to the credit of the corporation in such banks,
trust companies or other depositaries as the directors may select.
ARTICLE VI. - CERTIFICATES FOR SHARES AND THEIR TRANSFER
1. CERTIFICATES FOR SHARES
Certificates representing shares of the corporation shall be
in such form as shall be determined by the directors. Such certificates shall
be signed by the president and by the secretary or by such other officers
authorized by law and by the directors. All certificates for shares shall be
consecutively numbered or otherwise identified. The name and address of the
stockholders, the number of shares and date of issue, shall be entered on the
stock transfer books of the corporation. All certificates surrendered to the
corporation for transfer shall be canceled and no new certificate shall be
issued until the former certificate for a like number of shares shall have been
surrendered and canceled; except that in case of a lost, destroyed or mutilated
certificate a new one may be issued therefor upon such terms and indemnity to
the corporation as the directors may prescribe.
2. TRANSFERS OF SHARES
(a) Upon surrender to the corporation or the transfer agent
of the corporation of a certificate for shares duly endorsed or accompanied by
proper evidence of succession, assignment or authority to transfer, it shall be
the duty of the corporation to issue a new certificate to the person entitled
thereto, and cancel the old certificate; every such transfer shall be entered
on the transfer book of the corporation which shall be kept at its principal
office.
(b) The corporation shall be entitled to treat the holder of
record of any share as the holder in fact thereof, and, accordingly, shall not
be bound to recognize any equitable or other claim to or interest in such share
on the part of any other person whether or not it shall have express or other
notice thereof, except as expressly provided by the laws of this state.
ARTICLE VII. - FISCAL YEAR
The fiscal year of the corporation shall end on the 31st day
of December in each year.
-7-
<PAGE> 9
ARTICLE VIII. - DIVIDENDS
The directors may from time to time declare, and the
corporation may pay, dividends on its outstanding shares in the manner and upon
the terms and conditions provided by law.
ARTICLE IX. - SEAL
The directors shall provide a corporate seal which shall be
circular in form and shall have inscribed thereon the name of the corporation
and the words, "Corporate Seal".
ARTICLE X. - WAIVER OF NOTICE
Unless otherwise provided by law, whenever any notice is
required to be given to any stockholder or director of the corporation under
the provisions of these by-laws or under the provisions of the articles of
incorporation, a waiver thereof in writing, signed by the person or persons
entitled to such notice, whether before or after the time stated therein, shall
be deemed equivalent to the giving of such notice.
ARTICLE XI. - AMENDMENTS
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 sent out in
a notice of such meeting.
The By-laws of China Resources Development, Inc. (the "Corporation"),
were amended and restated pursuant to (i) a resolution of the Board of
Directors of the corporation unanimously adopted at a special meeting of the
Board held on November 29, 1996, and (ii) a vote by the shareholders of the
corporation holding at least a majority of each class of stock outstanding and
entitled to vote, at the annual meeting of shareholders held on December 30,
1996.
-8-
<PAGE> 1
EXHIBIT 4.2
Certificate of Amendment of Certificate of Designation of Series B
Convertible Preferred Stock, effective December 31, 1996
<PAGE> 2
CERTIFICATE OF AMENDMENT TO THE
CERTIFICATE OF DESIGNATION OF PREFERENCES,
RIGHTS AND LIMITATIONS OF
SERIES B CONVERTIBLE PREFERRED STOCK,
$.001 PAR VALUE, OF
CHINA RESOURCES DEVELOPMENT, INC.
China Resources Development, Inc., a Nevada corporation (the
"Corporation"), with its principal place of business at 23/F., Office Tower,
Convention Plaza, 1 Harbour Road, Wanchai, Hong Kong, hereby certifies that
pursuant to authority conferred upon its Board of Directors by the Articles of
Incorporation of the Corporation, and by the provisions of the General
Corporation Law of the State of Nevada, the Board of Directors, at its annual
meeting held on December 31, 1996, adopted a resolution providing for the
amendment to the designation and terms of a series of its 10,000,000 shares of
authorized preferred stock previously designated as Series B Convertible
Preferred Stock, previously consisting of 2,500 shares, the content of which
resolution is hereafter set forth in its entirety:
RESOLVED, that pursuant to the authority expressly granted to and
vested in the Board of Directors of the Corporation in accordance with the
provisions of its Articles of Incorporation, the Certificate of Designation
designating a series of 2,500 shares of the Corporation's authorized class of
preferred stock, established as Series B Convertible Preferred Stock, $.001 par
value (the "Series B Convertible Preferred Stock"), is hereby amended pursuant
the terms hereof. The number of shares of the Corporation's authorized class of
preferred stock to be designated as Series B Preferred Stock (no longer
convertible) (the "Series B Preferred Stock") shall be increased to 3,200,000
shares, and the preferences and relative, participating, optional, or other
special rights of, and the qualifications, limitations and restrictions imposed
upon the Series B Convertible Preferred Stock are hereby amended and restated as
follows:
The text of the original designation of Series B Convertible Preferred
Stock is 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
<PAGE> 3
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 Corporation.
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 forgoing designation of the shares of Series B Convertible
Preferred Stock is hereby deleted and replaced with the following designation of
Series B Preferred Stock:
The shares of Series B Preferred Stock shall entitle the holder thereof
to voting rights to the same extent and in the same manner as shares of
Common Stock, such shares of Series B Preferred Stock being aggregated
with any outstanding Common Stock at the record date of any vote for
voting purposes of the Corporation. The Series B 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 Preferred Stock, and
holders of Series B Preferred Stock have no rights whatsoever to
dividends or to distributions upon liquidation or dissolution of the
Corporation.
No shares of the Series B Preferred Stock shall be included in a
registration statement filed by the Corporation and the Corporation
shall not take any action to facilitate the registration of such
shares; provided, however, notwithstanding the forgoing, the
Corporation may, at its option and in its sole discretion, include the
Series B Preferred Stock in a registration statement filed by the
Corporation after July 22, 2000.
-2-
<PAGE> 4
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 Preferred Stock.
There are no shares of Series B Preferred Stock currently outstanding.
The only class or series of stock which, before this amendment, is senior to the
Series B Preferred Stock is the Corporation's Series A Preferred Stock, of which
there are no shares of such Series A Preferred Stock which remain outstanding.
WITNESS the seal of the Corporation and the signatures of its
authorized officers this 14th day of February, 1997.
CORPORATION:
ATTEST: CHINA RESOURCES DEVELOPMENT, INC.
/s/ Zhang Yibing By:/s/ Li Shinxing
- ------------------------------ ------------------------------------
Zhang Yibing, Secretary Li Shunxing, President
Signatures verified by:
/s/ Dominic Yiu Kuen Lai
- ------------------------------
Print Name: DOMINIC YIU KUEN LAI
---------------------
Notary Public
Hong Kong
[SEAL]
-3-
<PAGE> 1
EXHIBIT 10.28
Loan Agreement between HARC and the Farming Bureau, dated March 25,
1996, and the supplementary agreement dated December 31, 1996
(Certified English translation of original Chinese version.)
The undersigned officer of China Resources Development, Inc., hereby represents
that the following is a fair and accurate English translation of the original
Chinese version of the Loan Agreement between HARC and the Farming Bureau,
dated March 25, 1996, and the supplementary agreement dated December 31, 1996.
/s/ Wong Wah On
---------------------------------
Wong Wah On, Financial Controller
<PAGE> 2
LOAN AGREEMENT
Lender: General Bureau of Hainan State Farms
Borrower: Hainan Agricultural Resources Company Limited
WHEREAS in order to more effectively making use of the foreign raised capital
and to enable the Borrower to better plan for its production operation for
fiscal year 1996 and the new investment projects. The Borrower hereby applies
for a loan from the Lender.
NOW, THEREFORE, pursuant to mutual consultations, the Parties agree as follows:
1. TYPE OF LOAN: Shareholder's free interest loan.
2. AMOUNT OF LOAN: Renminbi Thirty Five Million Eight Hundred and Sixty Seven
Thousand Eight Hundred and Fifty Seven Yuan (RMB35,867,857.00).
3. LOAN PERIOD: The Loan shall be interest free and payable to an account
designated by the Borrower. The Loan shall be capitalized into registered
capital of the Borrower by the Lender as interest-free investment once the
procedures for the capital enlargement application and approval and the capital
verification are completed.
4. WARRANTIES BY THE PARTIES:
(1). The Lender should wire the Loan into a bank account designated by
the Borrower with the Bank of China, Hainan Branch before March 31, 1996. The
bank account number is 01-02-01-2039867.
(2) The Borrower should utilize the Loan according to the decisions on
its application made by the Board of Directors. The Borrower should report to
the Lender regularly with regard to the manner in which the Loan is applied.
5. PENALTY FOR DEFAULT: The Borrower should utilize the Loan according to the
decisions of the Board of Directors. Otherwise, the Lender can terminate the
Loan Agreement and call back the Loan.
6. ARBITRATION: Should any dispute arise from this Loan Agreement, both Parties
shall resolve them through friendly negotiations, failing which, they should be
submitted to the People's Court where the contract is signed, for solution.
7. LAWS APPLICABLE: The relevant rules and laws of the State and the normal
terms for a bank loan shall apply to such events in case they are not being
covered by this Agreement.
<PAGE> 3
8. MISCELLANEOUS: This Agreement shall become effective upon the date it is
signed by the Parties. This Agreement shall be made in duplicate and each party
shall retain one copy.
Lender: Borrower:
(General Bureau of Hainan State Farms) (Hainan Agricultural Resources
Co., Ltd.)
Representative: Representative:
(Han Jian Zhun) (Li Feilie)
Address: Address:
Telephone number: Telephone number:
Date: March 25, 1996 Date: March 25, 1996
<PAGE> 4
SUPPLEMENTARY LOAN AGREEMENT
Borrower: Hainan Agricultural Resources Company limited
Lender: General Bureau of Hainan State Farms
WHEREAS the Borrower and the Lender entered into a Loan Agreement dated March
25, 1996. According to the Agreement, the Lender agreed to lend an interest-free
loan, amounting Renminbi Thirty Five Million Eight Hundred and Sixty Seven
Thousand Eight Hundred and Fifty Seven Yuan (RMB35,867,857.00), to the Borrower.
NOW THEREFORE, pursuant to mutual consultations, the Parties agree to make
amendments to the Agreement as follows:
1. A new article (Article 5) will be inserted below Article 4 as below:
ARTICLE 5 RIGHTS OF SET-OFF: The Lender agrees, upon written notice by the
Borrower, the above interest-free loan or any additional loans that will be made
by the Lender to the Borrower, shall be used by the Borrower to offset any
amounts due by the Lender to the Borrower or any amounts due by the Lender's
subsidiary companies and related companies to the Borrower. The amounts being
offset shall be treated as repayment of loan by the Borrower.
2. The original articles 5 to 7 shall be amended to 6 to 8 accordingly.
This Agreement shall become effective upon the date it is signed by the Parties.
This Agreement shall be made in duplicate and each party shall retain one copy.
Borrower: Lender:
(Hainan Agricultural Resources (General Bureau of Hainan State
Company Limited) Farms)
Representative: Representative:
(Li Feilie) (Han Jian Zhun)
Date: December 31, 1996
<PAGE> 1
EXHIBIT 10.29
Loan Agreement between HARC and the Registrant, dated March 25, 1996
(Certified English translation of original Chinese version herewith.)
The undersigned officer of China Resources Development, Inc., hereby represents
that the following is a fair and accurate English translation of the original
Chinese version of the Loan Agreement between HARC and the Company, dated March
25, 1996.
/s/ Wong Wah On
---------------------------------
Wong Wah On, Financial Controller
<PAGE> 2
LOAN AGREEMENT
Lender: China Resources Development, Inc.
Borrower: Hainan Agricultural Resources Company Limited
WHEREAS in order to more effectively making use of the foreign raised capital
and to enable the Borrower to better plan for its production operation for
fiscal year 1996 and the new investment projects. The Borrower hereby applies
for a loan from the Lender.
NOW, THEREFORE, pursuant to mutual consultations, the Parties agree as follows:
1. TYPE OF LOAN: Shareholder's free interest loan.
2. AMOUNT OF LOAN: Renminbi Forty Five Million Six Hundred and Fifty Five
Thousand Yuan (RMB45,650,000.00).
3. LOAN PERIOD: The Loan shall be interest free and payable to an account
designated by the Borrower. The Loan shall be capitalized into registered
capital of the Borrower by the Lender as interest-free investment once the
procedures for the capital enlargement application and approval and the capital
verification are completed.
4. WARRANTIES BY THE PARTIES:
(1). The Lender should wire the Loan into a bank account designated by
the Borrower with the Bank of China, Hainan Branch before March 31, 1996. The
bank account number is 01-02-01-2039867.
(2) The Borrower should utilize the Loan according to the decisions on
its application made by the Board of Directors. The Borrower should report to
the Lender regularly with regard to the manner in which the Loan is applied.
5. PENALTY FOR DEFAULT: The Borrower should utilize the Loan according to the
decisions of the Board of Directors. Otherwise, the Lender can terminate the
Loan Agreement and call back the Loan.
6. ARBITRATION: Should any dispute arise from this Loan Agreement, both Parties
shall resolve them through friendly negotiations, failing which, they should be
submitted to the People's Court where the contract is signed, for solution.
7. LAWS APPLICABLE: The relevant rules and laws of the State and the normal
terms for a bank loan shall apply to such events in case they are not being
covered by this Agreement.
<PAGE> 3
8. MISCELLANEOUS: This Agreement shall become effective upon the date it is
signed by the Parties. This Agreement shall be made in duplicate and each party
shall retain one copy.
Lender: Borrower:
(China Resources Development, Inc.) (Hainan Agricultural Resources
Co., Ltd.)
Representative: Representative:
(Zhang Yibing) (Li Feilie)
Address: Address:
Telephone number: Telephone number:
Date: March 25, 1996 Date: March 25, 1996
<PAGE> 1
EXHIBIT 10.30
Rental Agreement between HARC and the Hainan Farming Bureau Testing
Center, dated August 9, 1996 (Certified English translation of
original Chinese version.)
The undersigned officer of China Resources Development, Inc., hereby represents
that the following is a fair and accurate English translation of the original
Chinese version of the Rental Agreement between HARC and the Hainan Farming
Bureau Testing Center, dated August 9, 1996.
/s/ Wong Wah On
---------------------------------
Wong Wah On, Financial Controller
<PAGE> 2
RENTAL AGREEMENT
PARTY A: HAINAN FARMING BUREAU TESTING CENTER
PARTY B: HAINAN AGRICULTURAL RESOURCES COMPANY LIMITED
Party A and party B agreed the terms and conditions as follows:
1. Party A has agreed to rent the sixth floor of Second Phase of the Farming
Bureau Building (the "Building") to Party B for office use.
2. The rental period is for eight years which starts from October 1, 1996 to
September 30, 2004. After the completion of the rental period, if Party B
still wish to use the Building, under the same terms and conditions as
offered to other party, Party A should give Party B the priority to rent
the Building.
3. The rental are charged by intervals. from October 1, 1996 to September 30,
2000, the monthly rental payment is Rmb Six Thousand Only. From October 1,
2000 to September 30, 2004, the monthly rental payment is decided by
mutual agreement of both parties based on the market price at that time
with preferential terms as offered by Party A.
4. The rental amount is paid semi-annually in advance. The first installment
should be paid within 10 days after the signing of this agreement. The
following rental payments should be made payable within 10 days after
every six months.
5. This agreement shall be terminated automatically if Party B delays the
rental payment for two months.
6. If Party B intends to make any renovation work on the Building, Party B
should inform Party A of the scale of the renovation work first and
renovate in accordance with the rules and regulations as imposed by the
government. All the costs and expenses incurred thereon and all the effect
inherent with the renovation work should be borne by Party B.
7. Party B shall not change the structure of the Building and its usage.
After the termination or expiry of this agreement, Party B should demolish
any add-in facilities and make the Building clean.
8. Party B shall take the sole responsibility of the safety and sanitary of
the Building.
9. Party B shall not sub-lease the Building, or otherwise, Party A shall have
the right to terminate this agreement and retain the Building.
10. All the electricity and building management fee shall be decided by Party
B and the Management Division of Farming Bureau Building mutually, and
shall be paid by Party B directly to the Management Division of Farming
Bureau Building.
11. During the rental period, Party A shall have the right to retain the
Building in accordance with the requirements imposed by its superior
government divisions because of the changes in State or government
policies. Under this situation, Party A should inform Party B 30 days in
advance and terminate the agreement. Party A should also repay back the
excess of the rental to Party B and Party B should move out the Building
unconditionally.
12. Any taxes or government charges payable during the rental period should be
borne by either party in accordance with the terms of this agreement.
<PAGE> 3
13. Both parties shall make any supplementary provisions after mutual
agreement and these provisions shall have the same legal effects as other
provisions in this agreement.
14. This agreement has altogether four copies, each party shall retain two
copies. This agreement is effective upon the date of signing by both
parties.
For and on behalf For and on behalf
Hainan Farming Bureau Testing Center Hainan Agricultural Resources
Company Limited
/s/ Huang Xiang Qian /s/ Lin Jia Ping
______________________________ ___________________________
Date: August 9, 1996
<PAGE> 1
EXHIBIT 10.31
Shareholders' Agreement on Business Restructuring among the Farming
Bureau, Guilinyang Farm and Billion Luck, dated as of October 1, 1996
(Certified English translation of original Chinese version.)
The undersigned officer of China Resources Development, Inc., hereby represents
that the following is a fair and accurate English translation of the original
Chinese version of the Shareholders' Agreement on Business Restructuring among
the Farming Bureau, Guilinyang Farm and Billion Luck, dated as of
October 1, 1996.
/s/ Wong Wah On
---------------------------------
Wong Wah On, Financial Controller
<PAGE> 2
SHAREHOLDERS' AGREEMENT ON BUSINESS
RESTRUCTURING
Parties involved:
General Bureau of Hainan State Farms (the "Farming Bureau")
Registered address: Nongken Street, Xiuying Caopo, Haikou City, Hainan
Province, China.
Guilinyang State Farm ("Guilinyang")
Registered address: Lingshan, Qiongshan City , Hainan Province, China.
Billion Luck Company Ltd. ("Billion Luck")
Registered address: Cregue Buildings, P.O. Box 116, Road Town, Tortola, British
Virgin Islands.
WHEREAS, Hainan Agricultural Resources Co. Ltd. ("HARC") was legally
established on June 28, 1994. The parties involved in this Agreement represent
all the shareholders of HARC. Farming Bureau owns 39% shares of HARC,
Guilinyang owns 5% shares of HARC and Billion Luck owns 56% shares of HARC.
WHEREAS, all the parties agree that, since the incorporation of HARC, the
natural rubber marketing and distribution operation has been its core business
operation with good operating results and represents one of the main sources of
income of HARC.
WHEREAS, the parties also agree that the performance of certain
procurement of materials and supplies operations of HARC is not too
satisfactory with overlapping divisions, excessive manpower and high operating
costs. In order to improve the operating perfermance of HARC, the business
operations shall be restructured.
WHEREAS, in the process of streamlining of the corporate structure and
rationalization of manpower, office facilities which become excessive or assets
with low return shall be sold. HARC shall transfer these assets together with
the corresponding liabilities to Farming Bureau. Farming Bureau, HARC, First
Supply and Second Supply shall enter into a separate "Asset and Staff Transfer
Agreement" in accordance with the provisions of this Agreement.
WHEREAS, the purpose of the restructuring is to reduce cost, to direct the
working capital from businesses with low return to businesses with high return
and to improve the operating performance.
NOW, THEREFORE, in consideration of the mutual agreements, provisions and
covenants contained herein, the parties agree as follows:
The headings used in this Agreement are given for convenience only and shall
not affect the interpretation of this Agreement.
Unless otherwise specified, the followings shall be referred as:
"Effective Date" are to the meaning of the provisions under Article 9 of this
Agreement.
"Base Date" are to September 30, 1996.
"Accepted Accounting Standard of PRC" are to the accounting standard, rules and
regulations as adopted in the PRC.
1
<PAGE> 3
"Assets Fair Value" are to the meaning of the provison under Article 3.5 of
this Agreement.
"First Supply" are to First Goods And Materials Supply And Sales Corporation.
"Second Supply" are to Second Goods And Materials Supply And Sales Corporation.
"Transferors" are to HARC, First Supply and Second Supply, collectively.
"Assets" are to the assets, rights, contracts, etc., which are transferred by
the Transferors to Farming Bureau. The details of which are listed out in the
Exhibit 'Statement of Assets and Liabilities'.
"Liabilities" are to all the liabilities which are transferred by the
Transferors to Farming Bureau. The details of which are listed out in the
Exhibit. "Statement of Assets and Liabilities"
"Assets and Staff Transfer Agreement" are to the agreement which are signed by
HARC, First Supply, Second Supply and Farming Bureau for the transfer of assets
to Farming Bureau (see Exhibit 1).
"Statement of Assets and Liabilities" represents the Exhibit to the Asset and
Staff Transfer Agreement.
"This Agreement" are to the provisions of this Agreement, including this
Agreement and its Exhibits.
"Farming Bureau" are to General Bureau of Hainan State Farms and unless the
context requires otherwise, includes its directly or indirectly controlled
subsidiaries, branches, divisions, associated companies, joint ventures and
legal entities.
"Records" are to the files, records, information, techniques or other
information with business value which relate to the assets transferred.
"Transferred Staff" are to the redundant staff of the Transferors who are taken
over by Farming Bureau.
"Accounts receivable" refers to the accounts receivable included in the
Exhibit- Statement of Assets and Liabilities to the Assets and Staff Transfer
Agreement.
"Accounts payable" refers to the accounts payable included in the
Exhibit-Statement of Assets and Liabilities to the Assets and Staff Transfer
Agreement.
"Other reseivables" refers to the other receivables included in the Exhibit -
Statement of Assets and Liabilities to the Assets and Staff Transfer Agreement.
"Other payables" refers to the other payables included in the Exhibit -
Statement of Assets and Liabilities to the Assets and Staff Transfer Agreement.
"Long Term Investments" refers to the long term investments included in the
Exhibit- Statement of Assets and Liabilities to the Assets and Staff Transfer
Agreement.
"Fixed assets" refers to the fixed assets included in the Exhibit-Statement of
Assets and Liabilities to the Assets and Staff Transfer Agreement.
"Inventories" refers to the inventories included in the Exhibit-Statement
of Assets and Liabilities to the Assets and Staff Transfer Agreement.
"Contracts" are to all the written and verbal contracts transferred to Farming
Bureau, including the contracts between the Transferors and the Transferred
Staff.
2
<PAGE> 4
"Responsibilities and Obligations" are to all the contractual and legal
responsibilities and obligations with respect to the assets, liabilities and
personnel transferred to Farming Bureau.
1 ORGANIZATION RESTRUCTURING
1.1 The wholly owned subsidiaries of HARC, First Supply and Second Supply,
whose name are to be changed to "Hainan Agricultural Resources First
Development Ltd." ("First Development") and "Hainan Agricultural Resources
Second Development Ltd." ("Second Development"), respectively.
1.2 The existing trading divisions of First Supply shall consolidated into
two trading divisions of First Development, namely, Rubber Division and
Materials and Supplies Procurement Division. A new division to handle the
import and export trade will also be established.
Rubber Division continues to be the core operation for natural rubber
marketing and distribution.
Materials and Supplies Division are consolidated from the existing various
materials and supplies divisions of First Supply. Its principal businesses
are to procure the production materials for the Hainan State Farms and
other customers, as well as trading of other materials.
Import and Export Division shall be responsible for the import and export
trading of rubber, rubber products and other materials.
1.3 The existing trading divisions of Second Supply shall also be
consolidated into two trading divisions of Second Development, namely,
Rubber Division, and Materials and Supplies Division. A new Import and
Export Division shall also be established to handle the impot and export
trade. These divisions have the same functions as those divisions of
First Development.
1.4 HARC shall establish a new division for investment management which is
responsible for all the investment activities of HARC.
1.5 The Board of Directors and management team of HARC shall be responsible
for the following matters:
(1) coordinate and allocate the workload among all the divisions of
HARC, First Supply and Second Supply, and work out a detail plan for
this.
(2) plan and carry out a detail action plan to complete the
establishment of the aforementioned divisions.
(3) amend and formulate the management system of HARC and its
subsidiaries.
(4) adjust and consolidate the accounting records of HARC and its
subsidiaries.
(5) appoint the executive management team of HARC and its
subsidiaries.
(6) amend and formulate the articles of associations of HARC and
its subsidiaries.
1.6 Any shareholders of HARC shall have the right to employ an independent
accountant to audit the adjusted accounting records immediately following
the restucturing exercise.
2 TRANSFER OF STAFF
3
<PAGE> 5
2.1 After the streamlining of the corporate structure of HARC, HARC and its
subsidiaries shall implement a staff reallocation program in order to
improve the operating efficiency and to reduce operating costs.
2.2 A summary of the number of staff, categorized by functions, remains in
HARC, First Supply and Second after the restructuring exercise is set out
in the Exhibit to this Agreement.
2.3 All the staff that are regsred as redundant under this Agreement shall be
taken over by Farming Bureau. But HARC and Farming Bureau shall take other
appropriate procedures by mutual agreement to deal with those staff whom
Farming Bureau are not willing to take over.
2.4 HARC, First Supply and Second Supply shall terminate the employment in
accordance with the employment contract terms with the Transferred Staff
and comply with all the legal requirements. The Transferors and Farming
Bureau shall take all the necessary steps in obtaining the termination
approval from the staff. The Farming Bureau shall also provide employment
to the Transferred Staff on a reasonable term of which the remuneration
shall not be less than the existing staff of Farming Bureau with
comparable grading and qualification.
2.5 Farming Bureau shall assist to resolve any disputes arising from the
Transferred Staff of HARC, First Supply and Second Supply following the
restructuring exercise.
2.6 The insurance contracts of the Transferred Staff shall also be
transferred to Farming Bureau at the same time when the staff are
transferred. Farming Bureau shall compensate the Transferors with
equivalent monetary value of the contracts.
2.7 According to the legal requirements and the employment contract terms, if
there are any redundancy costs which the Transferors are required pay to
the Transferred Staff. Such redundancy costs shall be reimbursed by
Farming Bureau.
3 TRANSFER OF ASSETS AND LIABILITIES
3.1 In the process of streamlining of the corporate structure and
rationalization of manpower, the office facilities which become excessive
or assets with low return shall be transferred by HARC, First Supply and
Second Supply to Farming Bureau together with the corresponding
liabilities. The parties involved shall enter into a separate agreement
to govern the transfer of assets, liabilities and staff. A sample of the
"Assets and Staff Transfer Agreement" is shown as an Exhibit.
3.2 All parties in this Agreement shall ensure that the transfer of assets
and liabilities, as shown in the Statement of Assets and Liabilities, to
Farming Bureau pursuant to the Assets and Staff Transfer Agreement entered
into between the Transferors and Farming Bureau will follow all the legal
procedures. Farming Bureau shall acquire all the assets and assume all
liabilities transferred.
3.3 Apart from the assumption of the responsibilities and obligations of the
liabilities corresponding to the assets transferred, Farming Bureau shall
not bear any other responsibilities and obligations that arises before the
transfer and which should be borne by the Transferors.
3.4 The transfer methods for all kinds of assets and liabilities shall
follow all the legal procedures and comply with all legal requirements.
3.5 The value of the net assets transferred shall be based on the fair value
as of the Base Date. Those fair values shall be determined by an
independent valuers jointly employed by the parties in this Agreement.
4
<PAGE> 6
3.6 Farming Bureau shall be responsible for the recovery of all the accounts
receivable. If necessary, the Transferors shall provide any assistance and
records for the collection of the accounts receivable. All the costs and
expenses incurred thereon by the Transferors shall be borne by Farming
Bureau.
3.7 Except for those disputes which have already been disclosed to Farming
Bureau, the Transferors shall be responsible for all the losses and
expenses for any disputes with third parties on the rights of ownership of
the transferred assets, if the disputes are related to the events occurred
and conditions existing before the Base Date which the Farming Bureau are
not accountable. Any such losses incurred by Farming Bureau thereon shall
also be compensated by the Transferors. If the disputes are related to the
events occurred after the Base Date which are not the responsibilities of
HARC, then Farming Bureau shall be solely accountable and should bear all
the expenses and losses incurred thereon.
3.8 Except for those mortgages and rights of lien which have already been
disclosed to Farming Bureau, the Transferors shall bear all the expenses
and losses incurred resulting from claims of any mortgages or rights of
lien on the transferred assets by third parties and if these mortgages or
rights of lien were created before the Base Date. Any expenses and losses
incurred by Farming Bureau thereon shall also be compensated by the
Transferors. If the mortgages or rights of lien on the transferred assets
are created after the Base Date, Farming Bureau shall bear all the
expenses and losses incurred thereon.
3.9 The Transferors shall not warrant the quality of any tangible assets
transferred, including but not limit to, fixed assets, consumable stores,
etc.. For those assets which are specificially excluded by Farming Bureau
before the Assets and Staff Transfer Agreement becomes effective, they
shall be handled separately by mutual agreement of the parties involved.
3.10 Any losses resulting from litigations or government actions on the assets
transferred shall be borne by Farming Bureau if the results of such
litigations and actions are not yet finalized before the Base Date. For
those assets which are specifically excluded by Farming Bureau before the
Assets and Staff Transfer Agreement becomes effective, they shall be
handled separately by mutual agreement of the parties.
3.11 Notwithstanding other provisions in this Agreement, the bank loans owed
by the Transferors to the banks and the amounts owed by Farming Bureau's
subsidiary farms to the Transferors shall be transferred as follows: the
amounts receivable from the subsidiary farms and related companies of
Farming Bureau shall be transferred to Farming Bureau on the Effective
Date. Farming Bureau shall be responsible to procure the consent of the
banks for the transfer of the bank loans no later than March 31, 1997.
Before the bank loans are formally transferred to Farming Bureau, Farming
Bureau shall be responsible for the repayment of the principal outstanding
and all the bank interest incurred commencing from the Base Date. Any
amount received or receivable from the subsidiary farms by the
Transferors after the Base Date shall belong to Farming Bureau. The
outstanding amount of the bank loans shall be used to reduce the amounts
payable by Farming Bureau to the Transferors when the bank loans are
formally transferred.
3.12 Farming Bureau represents and warrants to the Transferors that Farming
Bureau clearly understands and has carried out its own assessment to the
conditions and risks with respect to the assets and liablities to be
transferred by the Transferors pursuant to this Agreement. Farming Bureau
convenants to the Transferors that Farming Bureau shall bear all the
rights, rewards, risks and obligations of ownership of the transferred
assets and the corresponding liabilities immediately after the Base Date.
Farming Bureau shall not tender any claims and requests for
5
<PAGE> 7
compensation with respect to any changes in the conditions and risks of
the transferred assets and liabilities that may arise after the Base Date.
4 PAYMENT
4.1 Except for the provision of Article 3.11 of this Agreement, Farming
Bureau shall pay to the Transferors in cash the amount equivalent to the
fair value of the net assets transferred in accordance with the provision
of Article 3.5. In the event that the transfer is a net liabilities, the
amount of the net liabilities shall then be used to reduce the amount due
by the Farming Bureau to the Transferors.
4.2 A lump sum payment for the value of net assets transferred shall be made
by the Farming Bureau in accordance with the instructions of the
Transferors within 120 days upon the date of this Agreement.
5 TRANSFER OF CONTRACTS
5.1 The Transferors shall transfer the contracts related to the assets and
liabilitiess transferred to Farming Bureau.
5.2 Upon the effectiveness of the Assets and Staff Transfer Agreement, all
the rights and obligations of the Transferors inherent in the contracts
transferred shall be ended as of the Base Date, even though the legal
procedures for such transfer may not yet be completed. After the Base
Date, all the rights and obligations of the contracts shall rest on
Farming Bureau.
5.3 The Transferors shall have the obligations to provide all the details for
the performance of the contracts transferred to Farming Bureau, but shall
not have the obligations to compensate Farming Bureau for any losses
incurred by Farming Bureau resulting from the performance or
non-performance of the such contracts. For those contracts which are
specifically excluded by Farming Bureau before the Assets and Staff
Transfer Agreement becomes effective, they shall be handled separately by
mutual agreement of the parties.
6 RECORDS
6.1 The Transferors shall transfer all the relevant records related to the
assets to Farming Bureau.
6.2 The records transferred shall only limit to those which are kept by the
Transferors as of the Effective Date. The Transferors shall not be held
responsible for the incompleteness and incorrectness of the records
transferred, but shall give reasonable assistance on their rectification
if requested by Farming Bureau. All the costs incurred thereon shall be
borne by Farming Bureau.
7 TAXES AND CHARGES
7.1 All the taxes and government charges related to the holding or usage of
the assets, as derived in accordance with the Accepted Accounting Standard
of PRC, shall be borne by the Transferors, if those charges should be
accounted for before the Base Date in accordance with the accounting
standard, or otherwise, shall be borne by Farming Bureau.
7.2 Any taxes and government charges in relation to the transfer of assets,
as derived in accordance with the Accepted Accounting Standard of PRC,
shall be borne by the parties involved in accordance with the legal
requirements. All other charges shall be shared by the Transferors and
Farming Bureau on a reasonable basis.
6
<PAGE> 8
INSURANCE
8.1 The beneficiary of the insurance contracts purchased by the Transferors
on the assets shall be changed to Farming Bureau. Before the completion of
this process, any insurance compensation received by the Transferors shall
be paid to Farming Bureau.
8.2 The insurance premium which has been paid by the Transferors shall be
borne by the Transferors if those premium should be accounted for before
the Base Date in accordance with the accounting standard, or otherwise,
shall be borne by Farming Bureau.
9 EFFECTIVE DATE
This Agreement shall become effective and binding on all parties on
October 1, 1996.
10 ACTIONS AT EFFECTIVE DATE
10.1 As of the Effective Date of this Agreement, the parties shall present the
following documents:
(1) In accordance with the Articles of Associations and the legal
requirements, this Agreement shall be signed by the shareholders,
board of directors or other authorized persons and accompanied with
the photocopies of all the necessary and signed documents in making
this Agreement effective.
(2) The photocopies of other documents, certificates or approval
letters as are required in accordance with the laws and the
requirements of the relevant government authorities.
(3) The properly executed Assets and Staff Transfer Agreement.
11 OTHER REPRESENTATIONS AND WARRANTIES
11.1 The parties in this Agreement are legally established persons and have
the authority to carry out businesses, to owe debts, to sign contracts and
to have the civil rights.
11.2 This transaction is not outside the scope of the businesses of the
respective parties.
11.3 This Agreement are signed by the legally authorized persons only.
12 CONFIDENTIALITY
In the process of restructuring, the parties to this Agreement shall not
disclose any information to third parties unless the disclosure
isrequired by laws.
13 OTHER STIPULATIONS
13.1 The provisions of this Agreement overrule any other provisions among the
parties which contradict with the provisions of this Agreement.
13.2 The Chinese version of this Agreement is the only valid version.
13.3 This Agreement is executed on November 29, 1996.
7
<PAGE> 9
General Bureau of Hainan State Farms
/s/ Han Jian Zhun
______________________________
Authorized Representative
Guilinyang State Farm
/s/ Lin Shi Luan
______________________________
Authorized Representative
Billion Luck Company Ltd.
/s/ Li Fei Lie
______________________________
Authorized Representative
8
<PAGE> 10
SHAREHOLDERS' AGREEMENT ON BUSINESS RESTRUCTURING
EXHIBIT 2
Pursuant to the Shareholders' Agreement on Business Restructuring, the
districbution of employees (according to functions) of Hainan Agricultural
Resources Company Ltd., First Goods and Materials Supply and Sales Corporation
and the Second Goods and Materials Supply and Sales Corporation will be as
follows:
<TABLE>
<CAPTION>
Number of employees
-------------------
<S> <C>
Administration and management 25
Accounting and Finance 29
Sales and Purchases 122
Warehousing and transport 239
----
TOTAL 415
====
</TABLE>
9
<PAGE> 1
EXHIBIT 10.32
Assets and Staff Transfer Agreement among the Farming Bureau, HARC,
First Supply and Second Supply, dated as of October 1, 1996
(Certified English translation of original Chinese version.)
The undersigned officer of China Resources Development, Inc., hereby represents
that the following is a fair and accurate English translation of the original
Chinese version of the Assets and Staff Transfer Agreement among the Farming
Bureau, HARC, First Supply and Second Supply, dated as of October 1, 1996.
/s/ Wong Wah On
---------------------------------
Wong Wah On, Financial Controller
<PAGE> 2
ASSETS AND STAFF TRANSFER AGREEMENT
Hainan Agricultural Resources Co. Ltd. ("Party B") was legally established
on June 28, 1994. First Goods And Materials Supply And Sales Corporation
("Party C") and Second Goods And Materials Supply And Sales Corporation ("Party
D") are the wholly owned subsidiaries of Party B. The General Bureau of Hainan
State Farms ("Party A") is one of the shareholders of Party B. The above
parties come into an agreement on the transfer of assets and liabilities
together with the transfer of staff by Party C and Party D to Party A as
follows:
The headings used in this Agreement are given for convenience only and
shall not affect the interpretation of this Agreement.
Unless otherwise specified, the followings shall be referred as:
"Effective Date" are to the meaning of Article 8 of this Agreement.
"Base Date" are to September 30, 1996.
"Accepted Accounting Standard of PRC" are to the accounting standard, rules and
regulations as adopted in the PRC.
"Assets Fair Value" are to the meaning of the provison under Article 1.4 of
this Agreement.
"Transferors" are to Party B, Party C and Party D, collectively.
"Assets" are to the assets, rights, contracts, etc., which are transferred by
the Transferors to Party A. The details of which are listed out in the Exhibit
- -Statement of Assets and Liabilities.
"Liabilities" are to all the liabilities which are transferred by the
Transferors to Farming Bureau. The details of which are listed out in the
Exhibit -Statement of Assets and Liabilities.
"Statement of Assets and Liabilities" are to the contents as shown in the
Exhibit.
"This Agreement" are to the provisions of this Agreement, including this
Agreement and its Exhibits.
"Party A" are to Party A and unless the context requires otherwise, includes
its directly and indirectly controlled subsidiaries, branches, divisions,
associated companies, joint ventures and legal entities.
"Records" are to the files, records, information, techniques or other
information with business value which relate to the assets transferred.
"Transferred Staff" are to the redundant staff of the Transferors who are taken
over by Party A.
"Accounts receivable" refers to the accounts receivable included in the Exhibit
- - Statement of Assets and Liabilities to this Agreement.
"Accounts payable" refers to the accounts payable included in the Exhibit -
Statement of Assets and Liabilities to this Agreement.
"Other reseivables" refers to the other receivables included in the Exhibit -
Statement of Assets and Liabilities to this Agreement.
1
<PAGE> 3
"Other payables" refers to the other payables included in the Exhibit -
Statement of Assets and Liabilities to this Agreement.
"Long term investments" refers to the long term investments included in the
Exhibit - Statement of Assets and Liabilities to this Agreement.
"Fixed assets" refers to the fixed assets included in the Exhibit - Statement
of Assets and Liabilities to this Agreement.
"Inventories" refers to the inventories included in the Exhibit -
Statement of Assets and Liabilities to this Agreement.
"Contracts" are to all the written and verbal contracts transferred to Party A,
including the contracts between the Transferors and the Transferred Staff.
"Responsibilities and obligations" are to all the contractual and legal
responsibilities and obligations with respect to the assets, liabilities and
personnel transferred to Party A.
"Shareholders' Agreement on Business Operations Restructuring" are to the
shareholders' agreement on business operations restructuring as entered by
Party A, Party B and Billion Luck.
1 TRANSFER OF ASSETS AND LIABILITIES
1.1 According to the provisions of this Agreement, the parties in this
Agreement shall fulfill their respective obligations and responsibilities.
The Transferors shall transfer the assets and liabilities as shown in
Statement of Assets and Liabilities to Party A as of the Effective Date.
Party A shall purchase the assets and assume the corresponding liabilities
as of the Effective Date and shall bear all the responsibilities and
obligations inherent to the transfer since then.
1.2 Apart from the assumption of the responsibilities and obligations of the
liabilities corresponding to the assets transferred, Party A shall not
bear any other responsibilities and obligations that arises before the
transfer and which should be borne by the Transferors.
1.3 The transfer methods for all kinds of assets and liabilities should
follow all the legal procedures.
1.4 The value of the net assets transferred shall be based on fair value as
of the Base Date. Those fair values shall be determined by an independent
valuer jointly employed by the parties to this Agreement.
1.5 Party A shall be responsible for the recovery of all the accounts
receivable. If necessary, the Transferors shall provide any assistance and
records for the collection of the accounts receivable. All the costs and
expenses incurred thereon by the Transferors shall be borne by Party A.
1.6 Except for those disputes which have already been disclosed to Party A,
the Transferors shall be responsible for all the losses and expenses for
any disputes with third parties on the rights of ownership of the
transferred assets, if the disputes are related to the events occurred and
conditions existing before the Base Date which Party A are not
accountable. Any such losses incurred by Party A thereon shall also be
compensated by the Transferors. If the disputes are related to the events
occurred after the Base Date which are not the responsibilities of the
Transferors, then Party A shall be solely accountable and should bear all
the expenses and losses incurred thereon.
2
<PAGE> 4
1.7 Except for those mortgages and rights of lien which have already been
disclosed to Party A, the Transferors shall bear all the expenses and
losses incurred resulting from claims of any mortgages or rights of lien
on the transferred assets by third parties and if these mortgages or
rights of lien were created before the Base Date. Any expenses and losses
incurred by Party A thereon shall also be compensated by the Transferors.
If the mortgages or rights of lien on the transferred assets are created
after the Base Date, Party A shall bear all the expenses and losses
incurred thereon.
1.8 The Transferors shall not warrant to Party A the quality of any tangible
assets transferred, including but not limit to, fixed assets, consumable
stores, etc.. For those assets which are specifically excluded by Party A
before this Agreement becomes effective, they shall be handled separately
by mutual agreement of the parties involved.
1.9 Any losses resulting from litigations or government actions on the assets
transferred shall be borne by Party A if the results are not yet finalized
before the Base Date. For those assets which are specifically excluded by
Party A before this Agreement becomes effective, they shall be handled
separately by mutual agreement of the parties.
1.10 Notwithstanding other provisions in this Agreement, the bank loans owed
by the Transferors to the banks and the amounts owed by Party A's
subsidiary farms to the Transferors shall be transferred as follows: the
amounts receivable from the subsidiary farms and related companies of
Party A shall be transferred to Party A on the Base Date. Party A shall be
responsible to procure the consent of the banks for the transfer of bank
loans no later than March 31, 1997. Before the bank loans are formally
transferred to Party A, Party A shall be responsible for the repayment of
the principal outstanding and all the bank interest incurred commencing
from the Base Date. Any amount received or receivable from the subsidiary
farms and related conpanies by the Transferors after the Base Date shall
belong to Party A. The outstanding amount of the bank loans shall be used
to reduce the amounts payable by Party A to the Transferors when the bank
loans are formally transferred.
1.11 Farming Bureau represents and warrants to the Transferors that Farming
Bureau clearly understands and has carried out its own assessment to the
conditions and risks with respect to the assets and liablities to be
transferred by the Transferors pursuant to this Agreement. Farming Bureau
convenants to the Transferors that Farming Bureau shall bear all the
rights, rewards, risks and obligations of ownership of the transferred
assets and the corresponding liabilities immediately after the Base Date.
Farming Bureau shall not tender any claims and requests for compensation
with respect to any changes in the conditions and risks of the transferred
assets and liabilities that may arise after the Base Date.
2 PAYMENT
2.1 Except for the provision of Article 1.10 of this Agreement, Party A shall
pay to the Transferors in cash the amount equivalent to the fair value of
the net assets transferred in accordance with the provision of Article
1.4. In the event that the transfer is a net liabilities, the amount of
the net liabilities shall be used to reduce the amount due by Party A to
the Transferors.
2.2 In the event that the transfer is a net assets, Farming Bureau shall pay
to the Transferors the consideration for the fair value of the net assets
transferred in accordance to their respective instructions.
3
<PAGE> 5
2.3 Party A shall settle the consideration for the transfer of net assets
within 120 days upon the date of this Agreement.
2.4 Except for the obligations and responsibilities inherent to the said
transfer pursuant to this Agreement, Party A shall not bear any other
responsibilities and obligations which should be borne by the Transferors.
After the Effective Date, the Transferors shall not have any
responsibilities and obligations on matters in connection with the said
transfer that arises after the Base Date and are not in relation to
conditions existing before the Base Date. If any party incurs any losses
which shall be the responsibilities of the other party, the former shall
notice the latter in writing accompanied with the necessary proving
documents. The party who receives the notice shall indemnify the other
party within 30 days of receiving the notice.
2.5 Any other payments under the provisions of this Agreement shall also be
made within 30 days of receiving the notice from the other party.
3 TRANSFER OF STAFF
3.1 From the Effective Date onwards, all the redundant staff under this
Agreement shall be taken over by Party A. But the Transferors and Party A
shall take other appropriate procedures by mutual agreement to deal with
those staff whom Party A request not to take over before the Effective
Date.
3.2 The Transferors shall terminate the employment in accordance with the
employment contract terms with the staff and comply with all the legal
requirements. The Transferors and Party A shall take all the necessary
steps in obtaining the termination approval from the staff. Party A shall
also provide employment to the Transferred Staff on a reasonable term of
which the remuneration should not be less than the existing staff of Party
A with comparable grading and qualification.
3.3 In the event that the Transferred Staff are not willing to terminate the
employment relationship with the Transferors and, at the same time, the
Transferors is unable to legally terminate the employment contracts singly
as of the Effective Date, the Transferors shall continue to employ those
staff until the contracts can be terminated in accordance with the legal
requirements. Except for Article 3.1 provides otherwise, Party A shall
warrant to take over those staff within one year as from the Effective
Date.
3.4 The insurance contracts of the Transferred Staff shall also be
transferred to Party A at the same time when the staff are transferred.
Party A shall compensate the Transferors with equivalent monetary value of
the contracts.
3.5 After the transfer, Party A shall agree the Transferred Staff to carry on
any necessary work and allocate reasonable working schedules for a smooth
changeover of the Transferors.
3.6 According to the legal requirements and the employment contract terms,
any redundancy costs which the Transferors pay to the Transferred Staff
shall be reimbursed by Party A.
4 TRANSFER OF CONTRACTS
4.1 The Transferors shall transfer the contracts related to the assets
transferred to Party A.
4.2 The Transferors shall take all the reasonable steps to obtain the
confirmation from the third parties in respect to the transfer of
contracts. If the above confirmation
4
<PAGE> 6
cannot be obtained on or before the Effective Date, the Transferors
agree to continue to cooperate with Party A in obtaining the confirmation
and make the necessary arrangements for the fulfillment of contracts by
Party A. If the confirmation cannot be obtained eventually, the
Transferors shall fulfill the contracts in accordance with the
instructions of Party A. All the rights and responsibilities thereon shall
be borne by Party A.
4.3 After the Effective Date, all the rights and responsibilities of the
Transferors inherent from the contracts transferred shall be ended as of
the Base Date, even though the legal procedures for the transfer may not
yet be completed. After the Base Date, all the rights and responsibilities
of the contracts shall rest on Party A.
4.4 The Transferors shall have the obligations to provide all the details for
the performance of the contracts transferred to Party A, but shall not
have obligations to compensate Party A for any losses incurred by Party A
resulting from the performance or non-performance of such contracts. For
those which are specifically excluded by Party A before the Effective
Date, they shall be handled separately by mutual agreement of the parties.
5 RECORDS
5.1 The Transferors shall transfer all the relevant records related to the
assets and liabilities to Party A.
5.2 The records transferred shall only limit to those which are kept by the
Transferors as of the Effective Date. The Transferors shall not be held
responsible for the incompleteness and incorrectness of the records
transferred, but shall give reasonable assistance on their rectification
if requested by Party A. All the costs incurred thereon shall be borne by
Party A.
5.3 For the sake of continuation of the Transferors' business operations, the
Transferors may retain the duplicated copies of the records transferred
and shall inform Party A the details of the duplicated copies retained if
requested by Party A.
5.4 The parties shall cooperate to make any necessary changes to the records
for the fulfillment of transfer of rights of ownership of the assets in
accordance with the legal requirements.
6 TAXES AND CHARGES
6.1 All the taxes and government charges related to the holding or usage of
the assets, as derived in accordance with the Accepted Accounting Standard
of PRC, shall be borne by the Transferors, if those charges shall be
accounted for before the Base Date in accordance with the accounting
standard, or otherwise, shall be borne by Party A.
6.2 Any taxes and government charges in relation to the transfer of assets
shall be borne by the parties involved in accordance with the legal
requirements. All other charges shall be shared by the Transferors and
Party A on a reasonable basis.
7 INSURANCE
7.1 The beneficiary of the insurance contracts purchased by the Transferors
on the assets shall be changed to Party A. Before the completion of this
process, any insurance compensation received by the Transferors should be
paid to Party A.
5
<PAGE> 7
7.2 Party A shall inform the insurance companies of the changes and handle
the changing procedures. The Transferors shall provide any necessary
assistance for the changes.
7.3 The insurance premium which has been paid by the Transferors shall be
borne by the Transferors if those premium should be accounted for before
the Base Date in accordance with the Accepted Accounting Standard of PRC,
or otherwise, shall be borne by Party A.
8 EFFECTIVE DATE
This Agreement shall become effective and binding on October 1, 1996.
---------------
9 TRANSFERORS' WARRANTIES BEFORE EFFECTIVE DATE
Unless otherwise stated, the Transferors shall warrant the following
before this Agreement becomes effective:
(1) If this Agreement becomes effective within 6 months from the
Base Date, the Transferors shall warrant to run the business with the
assets and liabilities in reasonable efficiency between the Base Date
and the Effective Date.
(2) If this Agreement becomes effective after 6 months from the
Base Date, the Transferors shall warrant not to use the assets for
pledges which are outside the normal course of business between the
Base Date and the Effective Date.
(3) As requested by Party A, the Transferors shall allow the
designated staff of Party A to inspect the accounting records and
operation information of the Transferors for the sake of protecting
Party A's interests.
10 ACTIONS AT EFFECTIVE DATE
10.1 As of the date this Agreement becomes effective, the Transferors shall
present the following documents to party A:
(1) In accordance with the Articles of Associations of the
Transferors and the legal requirements, this Agreement should be
signed by the shareholders, board of directors or other authorized
persons and accompanied with the photocopies of all the necessary and
signed documents in making this Agreement effective.
(2) The photocopies of other documents, certificates or approval
letters as are required in accordance with the laws and the
requirements of government authorities.
10.2 As of the date this Agreement becomes effective, Party A shall present
the following documents to the Transferors:
(1) In accordance with the Articles of Associations of Party A and
the legal requirements, this Agreement shall be signed by the
shareholders, board of directors or other authorized persons and
accompanied with the photocopies of all the necessary and signed
documents in making this Agreement effective.
6
<PAGE> 8
(2) The photocopies of other documents, certificates or approval
letters as are required in accordance with the laws and the
requirements of the relevant government authorities.
11 ALL PARTIES' WARRANTIES AFTER EFFECTIVE DATE
11.1 The parties shall cooperate to inform the third parties in relation to
the assets and liabilities transferred and make all the necessary
arrangements in obtaining their confirmation of the transfer.
11.2 The parties shall cooperate and be responsible to assure smooth
procedures for staff transfer and to avoid any unnecessary losses of the
staff as a result of transfer.
11.3 The Transferors shall sign all the necessary documents as requested by
Party A, and shall agree and take all reasonable steps to assist Party A
to develop its operations in relation to the assets transferred.
11.4 The Transferors shall not sign any agreements, make any written or verbal
contracts, or take any actions in relation to the assets transferred
without the prior consent of Party A.
11.5 When Party A takes any actions or sign any agreements in relation to the
assets, it shall not impair the Transferors' interests. In addition, when
Party A intends to take any actions or sign any agreements which involve
the Transferors, it should inform the Transferors and accept any advices
as reasonably raised by the Transferors.
11.6 After the Effective Date, the Transferors may still develop any kinds of
business with the customers who are related to the assets and liabilities
transferred. And Party A shall not object on it.
12 TRANSFERORS' REPRESENTATIONS AND WARRANTIES
12.1 The Transferors are the legally established persons and have the
authority to carry out businesses, to owe debts, to sign contracts and to
have the civil rights.
12.2 This transaction is not outside the scope of the businesses of the
Transferors.
12.3 The signatories of the Transferors have received proper authorization to
sign this Agreement.
12.4 The Transferors have paid reasonable efforts in providing the information
and messages related to the assets and liabilities transferred to Party A
in suitable means.
13 PARTY A'S REPRESENTATIONS AND WARRANTIES
13.1 Party A is a legally established person and has the authority to carry
out businesses, to owe debts, to sign contracts and to have the civil
rights.
13.2 This transaction is not outside the scope of the businesses of the
Transferors.
13.3 This Agreement are signed by the legally authorized persons only.
14 COMPENSATIONS
7
<PAGE> 9
14.1 The Transferors shall compensate Party A of any losses for the following
events, including but not limit to, direct economic losses, third parties
compensation and the corresponding legal fees and litigation costs:
(1) Any defaulting acts of the Transferors after the Effective
Date;
(2) Any default or failure of the Transferors in complying with the
provisions,
convenants and warranties of this Agreement.
14.2 Party A shall compensate the Transferors of any losses, including but not
limit to, direct economic losses, third parties compensation and the
corresponding legal fees and litigation costs for the following events:
(1) Any defaulting acts of Party A after the Effective Date;
(2) Any default or failure of Party A in complying with the
provisions, convenants and warranties of this Agreement.
14.3 If any events as mentioned in 14.1 and 14.2 occur which cause litigations
or claims against any party of this Agreement by the third parties, that
party shall inform the other party, which he considers to be responsible,
immediately for deciding the defensive actions.
14.4 The party who receives the compensation shall pay efforts to minimize his
losses incurred and shall assist the party who pay the compensation in
exercising the right to claim any other third parties to recover the
compensation.
15 LIABILITIES FREE BY DISCLOSURE
If any party of this Agreement informs and makes disclosure to the other
parties to this Agreement for any matters which accounts to a
non-compliance of that party with any provisions of this Agreement before
the Effective Date, that party shall not be held responsible for any
compensation for losses incurred unless that party is requested by the
any other parties of this Agreement in writing for providing
rectification means before the Effective Date.
16 CONFIDENTIALITY
In the process of restructuring, the parties in this Agreement shall not
disclose any information to third parties unless the disclosure is
required by laws.
17 OTHER STIPULATIONS
17.1 The rights and responsibilities of this Agreement are not transferable.
17.2 The notices as required by this Agreement shall be in the means of
ordinary mail, facsimile or direct delivery. The mailing address and
facsimile number shall be those used for ordinary business operation. The
notices should be deemed to be received after 3 days from the day of
issue.
17.3 The provisions of this Agreement overrule any other provisions among the
parties which contradict with the provisions of this Agreement.
17.4 The invalidation or non-executable of any provisions of this Agreement
shall not make the other provisions invalid, unless the parties are unable
to rectify it so as to make this Agreement becomes unfair.
8
<PAGE> 10
17.5 The Chinese version of this Agreement is the only valid version.
17.6 This Agreement is signed on November 29, 1996.
Party A : General Bureau of Hainan State Farms
/s/ Han Jian Zhun
______________________________
Authorized Representative
Party B : Hainan Agricultural Resources Company
Ltd.
/s/ Li Fei Lie
______________________________
Authorized Representative
Party C : First Goods And Materials Supply And Sales Corporation
/s/ Chen Yu Xiang
______________________________
Authorized Representative
Party D : Second Goods And Materials Supply And Sales Corporation
/s/ Lin Ming Jiao
______________________________
Authorized Representative
9
<PAGE> 1
EXHIBIT 10.33
Exchange Agreement by and between the Registrant and Everbright Finance
& Investment Co. Limited, dated December 31, 1996
<PAGE> 2
EXCHANGE AGREEMENT
THIS EXCHANGE AGREEMENT ("Agreement") is made as of the 31st day of
December, 1996, by and among CHINA RESOURCES DEVELOPMENT, INC., a Nevada
corporation (the "Issuer"), and EVERBRIGHT FINANCE & INVESTMENT CO. LTD., a Hong
Kong company (the "Holder").
W I T N E S S E T H:
WHEREAS, the Issuer has previously issued to certain shareholders an
aggregate of 6,400,000 shares of the Issuer's Series A Preferred Stock, $1.00
par value (the "Series A Stock"), all of which shares of Series A Stock were
acquired by Holder; and
WHEREAS, the Issuer and the Holder previously entered into an Exchange
Agreement dated July 22, 1996, whereby the Holder exchanged the Series A Stock
for 32,000,000 shares of Issuer's common stock, $.001 par value (the "Common
Stock"), with substantial restrictions as to the participation of such shares of
Common Stock in dividends, distributions on dissolution and future
registrations; and
WHEREAS, the Issuer has approved a one-for-ten reverse split of its
outstanding shares of common stock, effective on the date hereof, and, as a
result of the reverse stock split, the Holder now owns 3,200,000 shares of
Common Stock; and
WHEREAS, the Issuer and the Holder deem it to be in the best interest
of the Company to now exchange the Common Stock for shares of the Issuer's
Series B Preferred Stock (the "Series B Stock") which have restrictions that are
the same or more stringent that those of the Common Stock.
NOW, THEREFORE, for and in consideration of the agreements contained
herein and other good and valuable consideration, the receipt and adequacy of
which are hereby acknowledged and confessed, the parties agree as follows:
1. Exchange.
a. Exchange Shares. The 3,200,000 shares of Common Stock, with
substantial restrictions, held by the Holder shall be exchanged for Series B
Stock based on an exchange rate of one share of Series B Stock for each share of
Common Stock. In accordance therewith, the Holder shall deliver to the Issuer
the stock certificate representing the 32,000,000 pre-reverse-split shares of
Common Stock held by the Holder, properly endorsed for transfer, and the Issuer
shall deliver to the Holder a stock certificate representing 3,200,000 shares of
Series B Stock (the "Exchange Shares") in exchange (the "Exchange") for the
Holder's 3,200,000 post-reverse-split shares of Common Stock.
<PAGE> 3
b. Waiver of Dividend and Distribution Rights; Restriction on
Public Trading. The Holder and the Issuer agree that the Series B Stock shall
have no rights (i) to receive dividends in connection with the Exchange Shares,
and (ii) to receive distributions in the event of liquidation of the Issuer. In
addition, the Holder and the Issuer agree that the Issuer will not include the
Exchange Shares in any registration statement filed by the Issuer and will not
take any action to facilitate the registration of the Exchange Shares until
after July 22, 2000. The foregoing restrictions will be set forth in the
Certificate of Designation of Preferences, Rights and Limitations of Series B
Preferred Stock filed with the Secretary of State of Nevada. The Holder also
agrees that any transfer of the Exchange Shares will be conditioned upon the
receipt by the Issuer of the transferee's written waiver of dividend and
distribution rights and acceptance of restrictions on public trading.
c. Exchange. The Exchange shall occur as of the date of this
Agreement (the "Effective Date"). The parties agree that there are no other
conditions to the obligation of the Holder to exchange the Common Stock for the
Exchange Shares.
2. Representations and Warranties of Issuer. Issuer represents and
warrants to the Holder as follows:
a. Issuer. Issuer is a corporation duly organized, validly
existing and in good standing under the laws of the State of Nevada.
b. Authority. Issuer has all necessary corporate power and
authority to enter into and carry out this Agreement. All corporate actions and
proceedings on the part of Issuer, its directors and shareholders necessary for
the authorization, execution, delivery and performance by Issuer of this
Agreement and the transactions contemplated hereby, including, without
limitation, the authorization, issuance and delivery of the Exchange Shares,
have been lawfully and validly taken. This Agreement is the valid and binding
obligation of the Issuer, enforceable in accordance with its terms, except as
such enforcement may be limited by bankruptcy, insolvency, reorganization,
moratorium or other laws and principles now or hereafter in effect relating to
or affecting the enforcement of creditors' rights in general and by general
principles of equity and except that the enforcement of the indemnity provisions
of Paragraph 5 may be limited by federal or state securities laws, other laws or
the public policy underlying any such laws.
c. Fully Paid and Non-Assessable Shares. Upon the Exchange,
the Exchange Shares will be duly authorized, validly issued, fully paid and
non-assessable, and will be free of any liens, charges, encumbrances,
restrictions on transfer or
-2-
<PAGE> 4
preemptive rights (except such that arise by acts of the Holder, under federal,
state or foreign securities laws or that exist by reason of this agreement or
any agreement heretofore entered into between the Holder and the Issuer) (each,
a "Lien").
d. No Violation. Neither the execution, delivery and
performance by Issuer of this Agreement, the consummation of the transactions
contemplated hereby nor the issuance of the Exchange Shares will: (i) violate
any provision of Issuer's Articles of Incorporation, as amended from time to
time, or Issuer's By-Laws; (ii) violate any provision of any statute or law or
any judgment, decree, order, regulation or rule of any court or governmental
authority to which Issuer or any of its properties or assets is subject, which
violation could have, singly or in the aggregate, a material adverse effect on
the business, properties, condition (financial or otherwise), results of
operations or prospects of Issuer; or (iii) violate, breach, constitute a
default under, permit the termination or acceleration of, or result in the
creation of any Liens upon the Exchange Shares or any material property of
Issuer under any agreement, instrument or obligation to which Issuer is a party
or by which it or any of its properties or assets is bound, which violation,
breach, default, termination acceleration or Lien could have, singly or in the
aggregate, any material adverse effect on the business, properties, condition
(financial or otherwise), results of operations or prospects of Issuer.
e. No Defaults. Issuer is not in violation of: (i) its
Articles of Incorporation or By-Laws as in effect on the effective date of this
Agreement; (ii) any statute or law or any judgment, decree, order, regulation or
rule of any court or governmental authority, which violation could have, singly
or in the aggregate, a material adverse effect on the business, properties,
condition (financial or otherwise), results of operations or prospects of
Issuer; or (iii) any material agreement to which Issuer is a party or by which
any of its properties or assets is bound, which violation could have, singly or
in the aggregate, a material adverse effect on the business, properties,
condition (financial or otherwise), results of operations or prospects of
Issuer.
f. No Consents. No notice to or filing with, and no
authorization, consent or approval of, any domestic or foreign court or any
public or governmental body or authority is necessary for the consummation by
Issuer of the transactions contemplated by this Agreement or the issuance of the
Exchange Shares except: (i) as may be required under the Securities Act of 1933,
as amended (the "1933 Act"), the securities or Blue Sky laws of any jurisdiction
or the corporate laws of the State of Nevada (including the Filing), (ii)
notices or filings of which the failure to give or make, or authorizations,
consents and approvals of which the failure to obtain, is based on information
given to Issuer by the
-3-
<PAGE> 5
Holder with respect to the Holder or its business, operations or ownership;
(iii) filings to amend the terms of the Issuer's Series B Stock to comply with
the terms of this Paragraph 1.b of this Agreement; and (iv) notices or filings
of which the failure to give or make, and authorizations, consents and approvals
of which the failure to obtain, would not individually or in the aggregate, have
a material adverse effect on the business, properties, condition (financial or
otherwise), results of operations or prospects of Issuer or adversely affect the
operations or prospects of Issuer to consummate the transactions contemplated by
this Agreement.
g. No Brokers or Finders. Issuer has retained no finder or
broker in connection transactions contemplated by this Agreement and hereby
agrees to indemnify and hold the Holder harmless from any liability for any
commission or compensation in the nature of an agent's fee to any broker or
other individual or entity (and the costs and expenses of defending against such
liability or asserted liability) arising from any act by Issuer or any of its
agents.
3. Representations and Warranties of Holder. The Holder hereby
represents and warrants to Issuer as follows:
a. Holder. The Holder is a company duly organized, validly
existing and in good standing under the laws of the jurisdiction set forth in
the preamble to this Agreement.
b. Authority. The Holder has all necessary power and authority
to enter into and carry out this Agreement. This Agreement is the valid and
binding obligation of the Holder, enforceable in accordance with its terms,
except as such enforcement may be limited by bankruptcy, insolvency,
reorganization, moratorium or other laws and principles now or hereafter in
effect relating to or affecting the enforcement of creditors' rights in general
and by general principles of equity and except that the enforcement of the
indemnity provisions of Paragraph 5 may be limited by federal or state
securities laws, other laws or the public policy underlying any of such laws.
c. No Violation. Neither the execution, delivery and
performance by the Holder of this Agreement nor the consummation of the
transactions contemplated hereby, will: (i) violate any provision of any statute
or law or any judgment, decree, order, regulation or rule of any court or
governmental authority to which the Holder or any of its properties or assets is
subject, which violation could have, singly or in the aggregate, a material
adverse effect on the Holder or its ability to perform its obligations under
this Agreement; or (ii) violate, breach, constitute a default under, permit the
termination or acceleration of, or result in the creation of any Lien upon any
material property of the Holder under any agreement, instrument or obligation to
which the Holder is a party or by which the Holder or
-4-
<PAGE> 6
any of its properties or assets is bound, which violation, breach, default,
termination, acceleration or Lien could have, singly or in the aggregate, a
material adverse effect on the Holder its ability to perform its obligations
under this Agreement.
d. No Consents. No notice to or filing with, and no
authorization, consent or approval of, any domestic or foreign court or any
public or governmental body or authority is necessary for the consummation by
the Holder of the transactions contemplated by this Agreement or the receipt of
the Exchange Shares except: (i) as may be required under the 1933 Act, the
securities or Blue Sky laws of any jurisdiction or the corporate laws of the
State of Nevada; (ii) notices or filings of which the failure to give or make,
or authorizations, consents and approvals of which the failure to obtain, is
based on information given to the Holder by Issuer with respect to Issuer or
Issuer's business, operations or ownership; and (iii) notices or filings of
which the failure to give or make, and authorizations, consents and approvals of
which the failure to obtain, would not individually or in the aggregate, have a
material adverse effect on the Holder or adversely affect Holder's ability to
consummate the transactions contemplated by this Agreement.
e. Investment Intent. The Holder is acquiring the Exchange
Shares solely for the Holder's own account and not with a view to, or for resale
in connection with, any distribution thereof. The Holder understands that the
Exchange Shares have not been registered under the 1933 Act by reason of
specified exemptions therefrom which depend upon, among other things, the bona
fide nature of the Holder's investment intent as expressed in this Subparagraph
(e).
f. Restricted Securities. The Holder understands that the
Exchange Shares may not be sold, transferred or otherwise disposed of without
registration and/or qualification under the 1933 Act and any applicable state
securities laws or Blue Sky Laws, or an exemption therefrom, and that in the
absence of appropriate registration and/or qualification, or exemption
therefrom, the Exchange Shares must be held indefinitely. The Holder further
understands that the Issuer will take no action to effect or facilitate such
registration and/or qualification until after July 22, 2000, at the earliest.
The Holder will not sell, transfer or otherwise dispose of the Exchange Shares
except pursuant to appropriate registration and/or qualification or an
appropriate exemption therefrom. Further, the Holder understands that the Issuer
will require, as a condition to any transfer of the Exchange Shares, that any
transferee of the Exchange Shares enter into an agreement by which such
transferee will waive its dividends rights and rights to distributions upon
liquidation of the Issuer in substantially the manner set forth in Paragraph
1.b. The Holder agrees to the placement of a legend on the certificate or
-5-
<PAGE> 7
certificates representing the Exchange Shares setting forth the foregoing
restrictions.
g. Experience. The Holder has such knowledge and experience in
financial and business matters and in making investments of this type that it is
capable of evaluating the merits and risks of acquiring the Exchange Shares.
h. Receipt of Information. The Holder has been furnished
access to Issuer's business records relating to the Exchange Shares, and such
additional information and documents as the Holder has requested, and has been
afforded an opportunity to ask questions of and receive answers from
representatives of Issuer concerning the terms and conditions of this Agreement
and the acquisition of the Exchange Shares.
i. Accredited Investor. The Holder is an "accredited
investor," as such term is defined in Rule 501(a) promulgated by the Securities
and Exchange Commission under the 1933 Act.
j. No Dividends or Distributions. The Holder understands that
the Exchange Shares are shares of Common Stock, except that, by virtue of the
Holder's waiver of dividend and distribution rights in Paragraph 1.b and for the
period set froth in such paragraph, the Exchange Shares do not entitle the
Holder to receive dividends as may be declared by the Board of Directors of the
Issuer from time to time or to receive distributions in the event of liquidation
of the Issuer.
k. No Brokers or Finders. The Holder has retained no finder or
broker in connection with the transactions contemplated by this Agreement and
hereby agrees to indemnify and hold Issuer harmless from any liability for any
commission or compensation in the nature of an agent's fee to any broker or
other individual or entity (and the costs and expenses of defending against such
liability or asserted liability) arising from any act by the Holder or any of
its agents.
4. Survival of Representations and Warranties. All representations and
warranties set forth in this Agreement shall survive the execution and delivery
of this Agreement, and the consummation of the transactions contemplated by this
Agreement, for the period of any applicable statutes of limitations.
5. Indemnification. Each party agrees to indemnify, defend and hold
harmless the other party from any claim, demand, loss, liability, damage or
expense, including, without limitation, interest, penalties and reasonable
attorneys' fees and costs of investigation, incurred as a result of any material
inaccuracy, misrepresentation or breach of any representation, warranty,
-6-
<PAGE> 8
covenant or agreement on the part of such party under or pursuant to this
Agreement and the Exhibits and Schedules hereto, if any.
6. General Provisions.
a. Notices. All notices, requests, demands and other
communications which are required or may be given under this Agreement shall be
in writing and shall be deemed to have been duly given if transmitted by
facsimile with receipt acknowledged, or upon delivery, if delivered personally
or by a recognized commercial courier with receipt acknowledged, or upon the
expiration of 72 hours after mailing, if mailed by registered or certified mail,
return receipt requested, postage prepaid, addressed as follows:
If to Issuer: CHINA RESOURCES DEVELOPMENT, INC.
Room 2005, 20th Floor
Universal Trade Center
3-5A Arbuthnot Road
Central, Hong Kong
Attn: Mr. Li Shunxing, President
Telephone No.: (852) 2810-6226
Facsimile No.: (852) 2810-6963
With a copy to: BAKER & HOSTETLER
Post Office Box 112
Orlando, FL 32802-0112
Attn: Kenneth C. Wright
Telephone No.: (407) 649-4000
Facsimile No.: (407) 841-0168
If to Holder: EVERBRIGHT FINANCE &
INVESTMENT CO. LIMITED
23/F., Office Tower
Convention Plaza
1 Harbour Road
Wanchai, Hong Kong
Attn: Mr. I.P. Zhang, Director
Telephone No.: (852) 2537-6689
Facsimile No.: (852) 2526-9912
Any party from time to time may change its address, facsimile number or
other information for the purpose of notices to that party by giving notice
specifying such change to the other parties hereto.
b. Entire Agreement. This Agreement (including the Schedules
and Exhibits, if any, to this Agreement) constitutes the entire agreement
between the parties with respect to its subject matter and no party shall be
entitled to benefits other than those specified herein, and all prior
agreements, statements,
-7-
<PAGE> 9
representations and warranties with respect to the subject matter of this
Agreement are superseded by this Agreement.
c. Amendments and Waivers. Neither this Agreement, nor any of
its provisions, may be amended or modified in any way, except by express written
agreement of the parties hereto. Neither any obligation of a party to this
Agreement, nor any breach or default by a party under this Agreement, may be
changed, waived, discharged or terminated except by a statement in writing
signed by the party against which the enforcement of such change, waiver,
discharge or termination is sought. No waiver by any party of any term or
condition of this Agreement, in any one or more instances, shall be deemed to be
or construed as a waiver of the same or any other term or condition of this
Agreement on any future occasion. Notwithstanding the foregoing, the Holder
shall have no power to revoke, and the Issuer shall have no power to allow the
revocation of, the Holder's waiver of dividend and distribution rights and the
restrictions on public trading set forth in Paragraph 1.b.
d. Successors and Assigns. This Agreement shall be binding
upon, and inure to the benefit of, the parties and their respective successors,
heirs, executors, administrators, legal representatives and assigns.
e. Severability. If any provision of this Agreement shall be
construed as invalid, illegal or unenforceable for any reason and in any
respect, and if the extent of such invalidity, illegality or unenforceability
does not destroy the basis of the bargain herein, the validity, legality and
enforceability of the remaining provisions shall not in any way be affected or
impaired thereby, and the remainder of this Agreement shall remain in full force
and effect, enforceable in accordance with its terms as if such provisions had
not been included, or had been modified as provided below, as the case may be.
To carry out the intent of the parties hereto as fully as possible, the invalid,
illegal or unenforceable provision(s) , if possible, shall be deemed modified to
the extent necessary and possible to render such provision(s) valid and
enforceable.
f. Headings. The captions and headings to the Paragraphs and
Subparagraphs of this Agreement are inserted for purposes of convenience only,
are not part of this Agreement and shall be given no force or effect in
construing or interpreting the meaning of this Agreement or any of its
provisions.
g. Counterparts. This Agreement shall be in writing and may be
executed in one or more counterparts, each of which shall be deemed an original,
and all of which taken together shall constitute one and the same instrument.
h. Expenses. Issuer and the Holder shall each pay its own
expenses with respect to this Agreement and the
-8-
<PAGE> 10
transactions contemplated hereby; provided that Issuer shall pay any stamp or
other taxes (excluding income taxes) which may be payable upon the issuance of
the Exchange Shares.
i. Governing Law and Venue. This Agreement shall be governed
by and construed, interpreted and enforced in accordance with the law of the
State of Florida without reference to the conflict of laws principles thereof.
The courts of Florida in the Ninth Judicial Circuit, and the United States
District Court for the Middle District of Florida (Orlando Division), shall be
the exclusive courts of jurisdiction and venue for any litigation, special
proceeding or other proceeding as between the parties that may be brought, or
arise out of, in connection with, or by reason of this Agreement. The Holder
hereby consents to the jurisdiction of such courts.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by their duly authorized signatories, effective as the date first set
forth above.
"Issuer"
CHINA RESOURCES DEVELOPMENT,
INC., a Nevada corporation
By:/s/ Li Shunxing
--------------------------------
Li Shunxing, President
"Holder"
EVERBRIGHT FINANCE & INVESTMENT
CO. LIMITED, a Hong Kong company
By:/s/ Zhang Yibing
--------------------------------
Zhang Yibing, Director and
Authorized Signatory
-9-
<PAGE> 1
EXHIBIT 10.34
China Resources Development, Inc., Amended and Restated
1995 Stock Option Plan, as amended on December 30, 1996
<PAGE> 2
CHINA RESOURCES DEVELOPMENT, INC.
AMENDED AND RESTATED
1995 STOCK OPTION PLAN
1. Purpose.
The plan shall be known as The China Resources Development, Inc.,
Stock Option Plan (the "Plan"). The purpose of the Plan shall be to
promote the long-term growth and profitability of China Resources
Development, Inc. (the "Company"), and its subsidiaries by (i)
providing certain officers, key employees, directors, consultants, and
affiliates of the Company and its subsidiaries with incentives to
improve stockholder values and contribute to the success of the
Company and (ii) enabling the Company to attract, retain and reward
the best available persons for positions of substantial
responsibility. Grants of incentive or nonqualified stock options, or
any combination of the foregoing, may be made under the Plan.
2. Definitions.
(a) "Incentive Stock Option" means an option conforming to the
requirements of Section 422 of the Internal Revenue Code of
1986, as amended (the "Code").
(b) "Nonqualified Stock Option" means any stock option
other than an Incentive Stock Option.
(c) "Subsidiary" and "subsidiaries" mean a corporation or
corporations of which outstanding shares representing 50% or
more of the combined voting power of such corporation or
corporations are owned directly or indirectly by the Company.
(d) "Disability" means a permanent and total disability as
defined in Section 72(m)(7) of the Code.
(e) "Retirement" means termination of one's employment with
the approval of the Committee.
(f) "Cause" means the occurrence of one of the following:
(i) Conviction for a felony or for any crime or
offense lesser than a felony involving the
property of the Company or a subsidiary.
(ii) Conduct that has caused demonstrable and serious
injury to the Company or a subsidiary, monetary or
otherwise, as evidenced by a final determination of
a court or governmental agency of competent
jurisdiction in effect after exhaustion or lapse of
all rights of appeal.
<PAGE> 3
(iii) Gross dereliction of duty or other grave
misconduct, as determined by the Company.
(g) "Competition" is deemed to occur if a participant who
has terminated employment subsequently obtains a
position as a full-time or part-time employee, as a
member of the board of directors, or as a consultant or
advisor with or to, or acquires an ownership interest
in excess of five percent (5%) of, a corporation,
partnership, firm or other entity that engages in any
of the businesses of the Company or any subsidiary with
which the participant was involved in a management role
at any time during the last five years of his employ-
ment with the Company or any subsidiary.
(h) "Change in Control" shall mean an event that would be
required to be reported in response to Item 1 of Form 8-K or
any successor form thereto promulgated under the Securities
Exchange Act of 1934 ("Exchange Act") if the Company were
subject to such Act (or that is so required if and when the
Company is subject to such Act).
(i) "Fair Market Value" of a share of Common Stock of the
Company shall mean, with respect to the date in
question, the average of the closing bid and asked
prices as quoted by the National Association of
Securities Dealers through its OTC Bulletin Board or
its automated quotation system ("NASDAQ"); or, if the
Company's Common Stock is listed or admitted to
unlisted trading privileges on a national stock
exchange, either (x) the average of the highest and
lowest officially-quoted selling prices on such
exchange or (y) the closing sale price of such stock,
as selected by the Committee; or if the Company's
Common Stock is not quoted by the NASD or NASDAQ,
traded on such an exchange, or otherwise traded
publicly, the value determined, in good faith, by the
Committee.
3. Administration.
A. The Plan shall be administered by a the Board of Directors
or by a committee appointed by the Board of Directors consisting of
at least three of its members. No member of the Committee, while a
member, shall be eligible to participate in the Plan. Subject to the
provisions of the Plan, and subject to ratification of the grant by
the Board of Directors (if so required by applicable state law), the
Committee shall be authorized 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 such 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. Decisions of
the
-2-
<PAGE> 4
Committee on all matters relating to the Plan shall be in the
Committee's sole discretion and shall be conclusive and binding on all
parties, including the Company, its stockholders, and the participants
in the Plan, unless otherwise determined by the Board of Directors.
The validity, construction, and effect of the Plan and any rules and
regulations relating to the Plan shall be determined in accordance
with applicable federal and state laws and rules and regulations
promulgated pursuant thereto. The Committee and shall keep full
records and accounts of its proceedings and transactions, and all such
transactions shall be reported to the Board of Directors. No member of
the Board of Directors or the Committee shall be liable for any action
or determination made in good faith with respect to the Plan or any
stock option granted under it.
B. The Committee may select one of its members as its
chairman, and shall hold meetings at such time and places as it may
determine. Acts by a majority of the Committee, or acts reduced to and
approved in writing by a majority of the members of the Committee,
shall be the valid acts of the Committee. All references in this Plan
to the Committee shall mean the Board of Directors if no Committee has
been appointed. From time to time the Board of Directors may increase
the size of the Committee and appoint additional members thereof,
remove members (with or without cause) and appoint new members in
substitution therefor, fill vacancies however caused, or remove all
members of the Committee and thereafter administer the Plan.
C. Notwithstanding the provisions of paragraph 3.A., stock
options may be granted to members of the Board of Directors; however,
no stock option shall be granted to any person who is, at the time of
the proposed grant, a member of the Board of Directors unless such
grant has been approved by a majority vote of the other members of the
Board of Directors. All grants of stock options to members of the
Board shall in all other respects be made in accordance with the
provisions of this Plan applicable to other eligible persons. Member
of the Board of Directors who either (i) are eligible for stock
options pursuant to the Plan or (ii) have been granted stock options
may vote on any matters affecting the administration of the Plan or
the grant of any stock options pursuant to the Plan, except that no
such member shall act upon the granting to himself of stock options,
but any such member may be counted in determining the existence of a
quorum at any meeting of the Board of Directors during which such
action is taken with respect to the granting to him of stock options.
D. Notwithstanding any other provision of this paragraph 3,
in the event the Company registers any equity security pursuant to
Section 12 of the Securities Exchange Act
-3-
<PAGE> 5
of 1934, as amended (the "Exchange Act"), any grants of stock options
to directors made at any time from the effective date of such
registration until six months after the termination of such
registration shall be made only by the Board of Directors; provided
however, that if a majority of the Board of Directors is eligible to
participate in the Plan or in any other stock option or other stock
plan of the Company or any of its affiliates, or has been so eligible
at any time within the preceding year, any grant of stock options to
directors must be made by, or in accordance with the recommendation
of, a committee consisting of three or more persons who may, but need
not be, directors or employees of the Company appointed by the Board
of Directors but having full authority to act in the matter, none of
whom is eligible to participate in this Plan or any other stock
option or other stock plan of the Company or any of its affiliates,
or has been eligible at any time within the preceding year. The
requirements imposed by the preceding sentence shall also apply with
respect to grants to officers who are not also directors. Once
appointed, the committee shall continue to serve until otherwise
directed by the Board of Directors.
4. Shares Available for the Plan.
Subject to adjustments as provided in Section 12, 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.
5. Participation.
Participation in the Plan shall be limited to those officers,
directors, key employees, consultants and affiliates of the Company
and its subsidiaries selected by the Committee. Nothing in the Plan or
in any grant there-under shall confer any right on an employee to
continue in the employ of the Company or shall interfere in any way
with the right of the Company to terminate an employee at any time.
Incentive or nonqualified stock options, or any combination
thereof, may be granted to such persons and for such number of shares
as the Committee shall determine (such individuals to whom grants are
made being herein called "optionees"). A grant of any type made
hereunder in any one year to an eligible employee shall neither
guarantee nor
-4-
<PAGE> 6
preclude a further grant of that or any other type to such employee
in that year or subsequent years.
The maximum number of shares with respect to which incentive
or nonqualified options, or any combination thereof, may be granted to
any single individual in any one calendar year shall not exceed
500,000 shares.
6. Incentive and Nonqualified Options.
The Committee may from time to time grant to eligible participants
Incentive Stock Options, Nonqualified Stock Options, or any
combination thereof. The options granted shall take such form as the
Committee shall determine, subject to the following terms and
conditions.
(a) Price. 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 grant, or (ii) 80% of the Fair Market Value of the
shares on the date the option is granted, as the Committee
determines.
(b) Cash Exercise. 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 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.
(c) Cashless Exercise. Options may be exercised in whole
or in part upon delivery to the Secretary of the
Company of an irrevocable written notice of exercise.
The date on which such notice is received by the
Secretary shall be the date of exercise of the option,
provided that within five business days of the delivery
of such notice the funds to pay for exercise of the
option are delivered to the Company by a broker acting
on behalf of the optionee
-5-
<PAGE> 7
either in connection with the sale of the shares underlying
the option or in connection with the making of a margin
loan to the optionee to enable payment of the exercise
price of the option. In connection with the foregoing, the
Company will provide a copy of the notice of exercise of
the option to the aforesaid broker upon receipt by the
Secretary of such notice and will deliver to such broker,
within five business days of the delivery of such notice to
the Company, a certificate or certificates (as requested by
the broker) representing the number of shares underlying
the option that have been sold by such broker for the
optionee.
(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 Option 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. All rights to purchase shares
pursuant to an option shall, unless sooner terminated,
expire at the date designated by the Committee. The
Committee shall determine the date on which each option
shall become exercisable and may provide that an option
shall become exercisable in installments. The shares
constituting each installment may be purchased in whole
or in part at any time after such installment becomes
exercisable, subject to such minimum exercise
requirement as is designated by the Committee. The
Committee may accelerate the time at which any option
may be exercised in whole or in part. Unless otherwise
provided herein, an optionee may exercise an option
only if he or she is, and has continuously been since
the date the option was granted, an employee of the
Company or a subsidiary. Prior to the exercise of the
option and delivery of the stock represented thereby,
the optionee shall have no rights to any dividends or be
entitled to any voting rights on any stock represented by
outstanding options.
(e) Limitations on Grants. If required by the Code at the time of
grant of an Incentive Stock Option, the aggregate Fair Market
Value (determined as of the grant date) of shares for which
such option is exercisable for the first time during any
calendar year may not exceed US$100,000.
-6-
<PAGE> 8
(f) Termination of Employment; Change in Control. If a
participant ceases to be an officer, employee, or
director of the Company or any subsidiary due to death
or Disability, each of the participant's options that
was granted at least one year prior to death or
Disability shall become fully vested and exercisable
and shall remain so for a period of one year from the
date of termination of employment, but in no event
after its expiration date; and all options granted to
such participant less than one year prior to death or
Disability shall be forfeited.
If a participant ceases to be an officer, employee
or director of the Company or any subsidiary upon the
occurrence of his or her Retirement, each of his or her
options granted at least one year prior to Retirement shall
become fully vested and exercisable and shall remain so for a
period of five years from the date of Retirement, but in no
event after its expiration date, provided that the
participant does not engage in Competition during that
five-year period unless he receives written consent to do so
from the Board. Notwithstanding the foregoing, Incentive
Stock Options not exercised by such participant within 90
days after Retirement will cease to qualify as Incentive
Stock Options and will be treated as Nonqualified Stock
Options under the Plan if required to be so treated under the
Code. All options granted to such participant less than one
year prior to Retirement shall be forfeited.
If a participant ceases to be an officer or employee
of the Company or any subsidiary due to Cause, all of his or
her options shall be forfeited.
If a participant ceases to be an officer or employee
of the Company or any subsidiary for any reason other than
death, Disability, Retirement or Cause, each of his or her
options that was exercisable on the date of termination shall
remain exercisable for, and shall otherwise terminate at the
end of, a period of 90 days after the date of termination of
employment, but in no event after its expiration date;
provided that the participant does not engage in Competition
during such 90-day period unless he or she receives written
consent to do so from the Board. All of the participant's
options that were not exercisable on the date of such
termination shall be forfeited.
Notwithstanding anything to the contrary herein, if
a participant ceases to be an officer, employee or director
of the Company or any subsidiary, for any reason other than
Cause, the Committee at its sole discretion may accelerate
the vesting of any option so that it will
-7-
<PAGE> 9
become fully vested and exercisable as of the date of such
participant's termination of employment. If there is a
Change in Control of the Company, there will be an
automatic acceleration of the vesting of any outstanding
option so that it will become fully vested and exercisable
as of the date of the Change in Control.
7. Withholding of Taxes.
The Company may require, as a condition to any grant under the Plan or
to the delivery of certificates for shares issued hereunder, that the
grantee pay to the Company, in cash, any federal, state or local taxes
of any kind required by law to be withheld with respect to any grant
or any delivery of shares. The Committee, in its sole discretion, may
permit participants to pay such taxes through the withholding of
shares otherwise deliverable to such participant in connection with
such grant or the delivery to the Company of shares otherwise acquired
by the participant. The Fair Market Value of shares of Common Stock
withheld by the Company or tendered to the Company for the
satisfaction of tax withholding obligations under this section shall
be determined on the date such shares are withheld or tendered. The
Company, to the extent permitted or required by law, shall have the
right to deduct from any payment of any kind (including salary or
bonus) otherwise due to a grantee any federal, state or local taxes of
any kind required by law to be withheld with respect to any grant or
to the delivery of shares under the Plan, or to retain or sell without
notice a sufficient number of the shares to be issued to such grantee
to cover any such taxes, provided that the Company shall not sell any
such shares if such sale would be considered a sale by such grantee
for purposes of Section 16 of the Exchange Act.
8. Written Agreement.
Each employee to whom a grant is made under the Plan shall enter into
a written agreement with the Company that shall
contain such provisions, consistent with the provisions of
the Plan, as may be established by the Committee.
9. Transferability.
No option granted under the Plan shall be transferable by an employee
otherwise than by will or the laws of descent and distribution or
pursuant to a qualified domestic relations order as defined by the
Code or Title I of the Employee Retirement Income Security Act, or the
rules thereunder. An option may be exercised only by the optionee or
his guardian or legal representative; provided that Incentive Stock
Options may be exercised by such guardian or legal representative only
if permitted by the Code and any regulations promulgated thereunder.
-8-
<PAGE> 10
10. Listing and Registration.
If the Committee determines that the listing, registration, or
qualification upon any securities exchange or under any law of shares
subject to any option is necessary or desirable as a condition of, or
in connection with, the granting of same or the issue or purchase of
shares thereunder, no such option may be exercised in whole or in part
or no shares issued unless such listing, registration or qualification
is effected free of any conditions not acceptable to the Committee.
11. Transfer of Employee.
Transfer of an employee from the Company to a subsidiary, from a
subsidiary to the Company, and from one subsidiary to another shall
not be considered a termination of employment. Nor shall it be
considered a termination of employment if an employee is placed on
military or sick leave or such other leave of absence which is
considered as continuing intact the employment relationship; in such a
case, the employment relationship shall be continued until the date
when an employee's right to reemployment shall no longer be guaranteed
either by law or by contract.
12. Adjustments.
In the event of a reorganization, recapitalization, stock split, stock
dividend, combination of shares, merger, consolidation, distribution
of assets, or any other change in the corporate structure or shares of
the Company, the Committee shall make such adjustments as it deems
appropriate in the number and kind of shares reserved for issuance
under the Plan, in the number and kind of shares covered by grants
made under the Plan, and in the exercise price of outstanding
options. In the event of any merger, consolidation or other
reorganization in which the Company is not the surviving or
continuing corporation, all options that were granted hereunder and
that are outstanding on the date of such event shall be assumed by
the surviving or continuing corporation.
13. Termination and Modification of the Plan.
The Board of Directors, without further approval of the shareholders,
may 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 approval of the
stockholders of the Company that would (a) increase (except as
provided in Section 12) the maximum number of shares reserved for
issuance under the Plan; (b) change the
-9-
<PAGE> 11
classes of employees eligible to be participants; or (iii) materially
increase the benefits accruing to participants in the Plan.
With the consent of the grantee affected thereby, the
Committee may amend or modify the grant of any outstanding option in
any manner to the extent that the Committee would have had the
authority to make such grant as so modified or amended, including
without limitation to change the date or dates as of which an option
becomes exercisable. The Committee shall be authorized to make minor
or administrative modifications to the Plan as well as modifications
to the Plan that may be dictated by requirements of federal or state
laws applicable to the Company or that may be authorized or made
desirable by such laws.
14. Commencement Date; Termination Date.
The date of commencement of the Plan shall be March 31, 1995. Unless
previously terminated, the Plan shall terminate at the close of
business on March 31, 2005.
15. Cash Awards.
The Committee may authorize cash awards to any participant receiving
shares under the Plan in order to assist such participant in meeting
his or her tax obligations with respect to such shares.
16. Provisions Applicable Solely to Insiders.
The following provisions shall apply only to persons who are subject
to Section 16 of the Securities Exchange Act of 1934 with respect to
securities of the Company ("Insiders"):
(a) No Insider shall be permitted to transfer any
securities of the Company acquired by him, except to
the extent permitted by 17 C.F.R.ss.240.16a-2(d)(1),
upon the exercise of any Incentive Stock Option or
Nonqualified Stock Option, until at least six months
and one day after the later of (i) the day on which
such security is granted to the participant or (ii) the
day on which the exercise or conversion price of such
security is fixed.
(b) An Insider may elect to have shares withheld from a
grant made under the Plan or tender shares to the
Company in order to satisfy the tax withholding
consequences of a grant made under the Plan, only
during the period beginning on the third business day
following the date on which the Company releases the
financial information specified in 17 C.F.R.ss.240.16b-
3(e)(1)(ii) and ending on the twelfth business day
following such date.
-10-
<PAGE> 12
(c) Notwithstanding Section 19 (b)(ii) hereof, an Insider may
elect to have shares withheld from a grant made under the
Plan in order to satisfy tax withholding consequences thereof
by providing the Company with a written election to so
withhold at least six months in advance of the withholding of
shares otherwise issuable upon exercise of an option.
The China Resources Development, Inc., 1995 Stock Option Plan was
amended and restated pursuant to (i) a resolution of the Board of Directors of
the corporation unanimously adopted at a special meeting of the Board held on
November 29, 1996, and (ii) a vote by the shareholders of the corporation
holding at least a majority of each class of stock outstanding and entitled to
vote, at the annual meeting of shareholders held on December 30, 1996.
-11-
<PAGE> 1
EXHIBIT 11.3
Computation of Earnings Per Share for Fiscal Year ended December 31,
1996
<PAGE> 2
CHINA RESOURCES DEVELOPMENT INC
EXHIBIT 11.3 - STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
(Amounts in thousands except share and per share data)
<TABLE>
<CAPTION>
Year ended December 31,
1994 1995 1996
-----------------------------------
<S> <C> <C> <C>
Primary
Average shares outstanding 1,200,000 1,200,000 3,533,512
Net effect of dilutive stock options -
based on the treasury stock method
using average market price -- 30,356 219,170
Assume conversion of series B convertible
preferred stock -- 2,251 --
--------- --------- ---------
Total 1,200,000 1,232,607 3,752,682
========= ========= =========
Net income RMB10,282 RMB19,175 RMB35,822
========= ========= =========
Per share amount RMB 8.57 RMB 15.56 RMB 9.55
========= ========= =========
Fully Diluted
Average shares outstanding 1,200,000 1,200,000 3,533,512
Net effect of dilutive stock options -
based on the treasury stock method using
the year-end market price, if higher than
average market price -- 47,424 219,798
Assume conversion of series B convertible
preferred stock -- 2,251 --
--------- --------- ---------
Total 1,200,000 1,249,675 3,753,310
========= ========= =========
Net income RMB10,282 RMB19,175 RMB35,822
========= ========= =========
Per share amount RMB 8.57 RMB 15.34 RMB 9.54
========= ========= =========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> RENMINBI YUAN
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 8.30
<CASH> 131,006
<SECURITIES> 0
<RECEIVABLES> 4,212
<ALLOWANCES> 0
<INVENTORY> 55,452
<CURRENT-ASSETS> 685,216
<PP&E> 6,504
<DEPRECIATION> 3,211
<TOTAL-ASSETS> 705,113
<CURRENT-LIABILITIES> 383,742
<BONDS> 0
0
270
<COMMON> 48
<OTHER-SE> 212,743
<TOTAL-LIABILITY-AND-EQUITY> 705,113
<SALES> 1,827,499
<TOTAL-REVENUES> 1,833,553
<CGS> 1,677,056
<TOTAL-COSTS> 1,729,357
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 19,870
<INCOME-PRETAX> 84,326
<INCOME-TAX> 13,991
<INCOME-CONTINUING> 35,822
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 35,822
<EPS-PRIMARY> 9.55
<EPS-DILUTED> 9.54
</TABLE>
