SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the fiscal year ended December 31, 1998
CHINA RESOURCES DEVELOPMENT, INC.
(Exact name of Registrant as specified in its Charter)
Nevada 33-5628-NY 87-02623643
------ ---------- -----------
(State or other jurisdiction (Commission File No.) (IRS Employer
of incorporation) Identification No.)
Room 2005, 20/F., Universal Trade Centre,
3-5A Arbuthnot Road, Central, 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. [X]
State the aggregate market value of the voting stock held by
non-affiliates of the registrant computed by reference to the price at which the
stock was sold, or the average bid and asked prices of such stock, as of a
specified date within 60 days prior to the date of filing. (See definition of
affiliate in Rule 405, 17 CFR 230.405.): $2,255,373 as of March 31, 1999.
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. 5,929,004 shares of
Common Stock, $.001 par value (as of March 31, 1999).
DOCUMENTS INCORPORATED BY REFERENCE: Definitive Proxy Statement for
1998 Annual Meeting of Shareholders (Schedule 14A) is incorporated by reference
in Part I, Item 4, hereof.
<PAGE>
CONVENTIONS
-----------
Unless otherwise specified, all references in this report to "U.S.
Dollars," "Dollars," "US$," 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, 1998,
which was U.S.$1.00 = Rmb8.28. 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, 1998, which was US$1.00
= HK$7.75. The Renminbi is not freely convertible into foreign currencies and
the quotation of exchange rates does not imply convertibility of Renminbi into
U.S. Dollars or other currencies. All foreign exchange transactions take place
either through the Bank of China or other banks authorized to buy and sell
foreign currencies at the exchange rates quoted by the People's Bank of China.
No representation is made that the Renminbi or U.S. Dollar amounts referred to
herein could have been or could be converted into U.S.
Dollars or Renminbi, as the case may be, at the PBOC Rate or at all.
References to "Billion Luck" 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" or "U.S. 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 8,379,000 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>
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 China
Resources Development, Inc.
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 Company's ability to hedge against the risks associated with natural rubber
prices by trading in natural rubber commodities futures; (ii) the Company's
policies regarding investments, dispositions, financings, conflicts of interest
and other matters; and (iii) trends affecting the Company's financial condition
or results of operations. Any such forward-looking statement is not a guarantee
3
<PAGE>
of future performance 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>
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 (which
would now be 1,080,000 shares). 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 changed from "Hainan Agricultural Resources Company Limited" to "Hainan
Zhongwei Agricultural Resources Company Limited."
HARC is a Chinese company incorporated on June 28, 1994, with a
registered capital of Rmb100 million (US$12.08 million). Billion Luck made a
cash contribution of Rmb56 million (US$6.76 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$4.71 million). 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. Pursuant to an Agreement for the Sale and Purchase of Share in
HARC dated April 30, 1998 between Guilinyang Farm and the Company, the Company
purchased 5,000,000 shares, representing 5% of the total issued and outstanding
share capital of HARC, from Guilinyang Farm for consideration of Rmb7 million
(US$0.85 million). After the said purchase, the Company's effective interest in
HARC became 61%. The remaining interest in HARC of 39% was held by the Farming
Bureau.
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
1997, according to data published in China Statistical Yearbook 1998 and
Statistical Yearbook of Hainan 1998, Hainan Province accounted for approximately
60% of the domestic production of natural rubber in the PRC, of which
approximately 77% of that 60% is from the Hainan State Farms and approximately
23% is from non-state farms. Accordingly, the Hainan State Farms control 46% 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 existing rubber inventories and certain firm
commitments for the purchase of natural rubber, the Company, through HARC and
the Operating Subsidiaries, enters into natural rubber commodity 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 commodity 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, HARC and the Operating Subsidiaries procure, for the
Farming Bureau, the Hainan State Farms and other affiliated customers, many
types of production materials, such as automobiles, farm equipment, fuel, and
chemicals, as well as for other customers unaffiliated with the Farming Bureau.
5
<PAGE>
The following chart illustrates the equity ownership by percentage of
each of the Company's principal subsidiaries as of December 31, 1998:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
--------------------------------
| CHINA RESOURCES |
------------| DEVELOPMENT, INC., |
| | a Nevada corporation |
| -------------------|------------
| 100% |
| -------------------|------------
| | BILLION LUCK COMPANY |
| | LTD., |
| | a British Virgin Islands |
| | company |
| -------------------|------------
| |
| | ----------------------------
| | 39% | FARMING BUREAU, |
| | ---------------------------------| a division of the PRC |
| | | | Ministry of Agriculture |
| | | ----------------------------
| 56% | |
| -------------------|-----|------
| | HAINAN ZHONGWEI AGRICULT- |
| 5% | URAL RESOURCES CO. LTD., |
----------- | 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 seven trading
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 has resulted 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
divisions of the Operating Subsidiaries have now been reduced to only a few
principal trading divisions. Cash management and policy making have become more
centralized, ensuring that capital resources can be allocated to trading
divisions more efficiently and effectively. A simplified management structure
has also enhanced the efficiency of HARC's management reporting system. The
Company's management believes that HARC's selling and administrative expenses
have been 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,
have improved the Company's liquidity and allowed it to pursue additional
investment opportunities.
The business of HARC is principally divided into the natural rubber
trade and materials trade. Each trading division is a profit center and has its
own accounting function. Every quarter, each division submits its financial
statements to First Supply or Second Supply for consolidation. Those companies,
in turn, submit the combined accounts to HARC for consolidation. The General
Manager of each division accounts for its results to the General Manager of
First Supply or Second Supply, who, in turn, accounts for the overall results to
the board of directors of HARC.
HARC has a two-tier structure with a board of directors and a
supervisory board. The board of directors is responsible for the day-to-day
management of and all major decisions relating to HARC (except decisions that
may be made by HARC's shareholders during a general meeting of the shareholders)
and, as of December 31, 1998, was made up of 5 members, of which two were
6
<PAGE>
nominated by the Farming Bureau and three 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 Manager of HARC is also a member of the
board. The General Manager of HARC was nominated by Billion Luck.
The supervisory committee 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, 1998, the supervisory board was made up of three members, one of
which was nominated by Billion Luck and two of which were nominated by the
Farming Bureau. One of the two members nominated by the Farming Bureau was
elected by the workers of HARC.
The following chart illustrates the organizational and management
structure of HARC:
<TABLE>
<CAPTION>
<S> <C> <C>
---------------------------- ----------------------------
| BOARD OF | | SUPERVISORY |
| DIRECTORS |----------------| COMMITTEE |
-------------|-------------- ----------------------------
|
-------------|--------------
| GENERAL |
| MANAGER |
-------------|--------------
|
|--------------------------------------------|-------------------------------------------|
| | |
- --------------|---------------- -------------|-------------- -------------|--------------
| DEPUTY | | DEPUTY | | DEPUTY |
| GENERAL MANAGER | | GENERAL MANAGER | | GENERAL MANAGER |
- --------------|----------------- -------------|-------------- -------------|--------------
| | |
| | |
| | |
- --------------|---------------- -------------|-------------- -------------|--------------
| FIRST | | SECOND | | HEADQUARTERS |
| SUPPLY (1) | | SUPPLY (2) | | (3) |
- ------------------------------- ---------------------------- ----------------------------
</TABLE>
(1) The principal businesses in which First Supply's trading divisions
engage include: Natural Rubber, Fuels & Chemicals, Fertilizers,
Automobile Trading.
(2) The principal businesses in which Second Supply's trading divisions
engage include: Natural Rubber, Fuels & Chemicals, Fertilizers,
Automobiles, Farm Equipment & Machinery.
(3) The principal businesses in which the HARC engages include: Investment
Holding, Trading of Natural Rubber and Other Agricultural Products and
Futures Trading.
Activities of HARC and the Operating Subsidiaries
HARC and 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. Since 1997, HARC and the
Operating Subsidiaries have reduced the scope of procurement of certain material
and supplies in view of the weak consumption market and unsatisfactory profit
margin. Currently, HARC and the Operating Subsidiaries sell production
materials, including fertilizers, fuels, chemicals, farm equipment and
machinery, automobiles to the Hainan State Farms, the Farming Bureau, and other
unaffiliated customers, and they trade natural rubber commodity futures to hedge
the price risk associated with existing inventories and certain firm commitments
for the purchase of natural rubber. HARC and the Operating Subsidiaries also
enter into natural rubber commodity futures contracts which are not specific
hedges. However, HARC and the Operating Subsidiaries have temporarily ceased the
trading of natural rubber commodity futures contracts since the third quarter of
1998 in view of the high volatility of the futures market and the risk of
potential default by futures counter-parties due to the sharp decrease in market
price of natural rubber in 1998.
7
<PAGE>
In fulfilling their role as trading partners of the Farming Bureau,
HARC and the Operating Subsidiaries serve as a sales outlet for the raw natural
rubber produced by the Hainan State Farms and procure production materials for
the Farming Bureau and the Hainan State Farms. 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.
HARC and the Operating Subsidiaries determine the selling price according to
market conditions. However, the Farming Bureau guarantees the Operating
Subsidiaries a minimum gross profit margin of 3.5% on natural rubber purchased
from the Hainan State Farms as set forth in the Long-Term Sale and Purchase
Agreement.
With respect to the procurement of materials and supplies, HARC and 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 HARC and 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, HARC and 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, HARC and 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).
INDUSTRY SEGMENTS
HARC and the Operating Subsidiaries are principally engaged in the
distribution of natural rubber, the procurement of materials and supplies and
the distribution of other agricultural products in the PRC.
In conformity with Item 101(b) of Regulation S-K, the following table
sets forth the audited historical financial information related to Industry
Segments (amounts in thousands). See Financial Statements and Notes included
therein attached as Appendix A hereto.
<TABLE>
<CAPTION>
Year Ended December 31,
- ------------------------------------------------------------------------------------------------------
1996 1997 1998 1998
---- ---- ---- ----
(Rmb) (Rmb) (Rmb) (US$)
<S> <C> <C> <C> <C>
Net sales to external customers:
Natural Rubber:
Net sales to unaffiliated customers 1,519,060 858,211 453,952 54,825
Net sales to affiliates - 245,934 16,121 1,947
------------ ---------- --------- ----------
1,519,060 1,104,145 470,073 56,772
------------ ---------- --------- ----------
Materials, supplies and other
agricultural products
Net sales to unaffiliated customers 102,745 12,909 43,367 5,238
Net sales to affiliates 205,694 32,117 14,252 1,721
------------ ---------- --------- ----------
308,439 45,026 57,619 6,959
------------ ---------- --------- ----------
8
<PAGE>
Year Ended December 31,
- ------------------------------------------------------------------------------------------------------
1996 1997 1998 1998
---- ---- ---- ----
(Rmb) (Rmb) (Rmb) (US$)
Total consolidated net sales 1,827,499 1,149,171 527,692 63,731
============ ========== ========= ==========
Depreciation and amortization expenses:
Natural rubber 1,058 1,362 1,287 155
Materials, supplies and other
agricultural products 747 56 45 5
------------ ---------- --------- ----------
Total segment depreciation and
amortization expenses 1,805 1,418 1,332 160
Reconciling item:
Depreciation and amortization expenses
attributable to corporate assets 35 39 38 5
------------ ---------- --------- ----------
Total consolidated depreciation and
amortization expenses 1,840 1,457 1,370 165
============ ========== ========= ==========
Segment profit/(loss):
Natural rubber 45,919 61,104 3,465 418
Materials, supplies and other
agricultural products 63,511 4,777 (7,967) (962)
------------ ---------- --------- ----------
Total segment profit/(loss) 109,430 65,881 (4,502) (544)
Reconciling items:
Corporate expenses (7,736) (13,162) (15,852) (1,914)
Loss on impairment of an
investment - - (49,969) (6,035)
Income from cost method investments 1,525 - - -
Interest income 29,602 14,849 6,862 829
Interest expenses (48,495) (15,007) (289) (35)
------------ ---------- --------- ----------
Total consolidated income/(loss) before
income taxes 84,326 52,561 (63,750) (7,699)
============ ========== ========= ==========
Segment assets:
Natural rubber 542,005 222,507 258,090 31,170
Materials, supplies and other
agricultural products 134,837 87,916 16,298 1,968
------------ ---------- --------- ----------
Total segment assets 676,842 310,423 274,388 33,138
Reconciling item:
Corporate assets 40,211 14,084 8,046 972
Investments 12,344 147,671 119,301 14,408
Intersegment receivables (24,284) (34,298) (31,009) (3,745)
------------ ---------- --------- ----------
Total consolidated assets 705,113 437,880 370,726 44,773
============ ========== ========= ==========
Expenditure for additions to
long-lived assets
Natural rubber - 2,884 332 40
Materials, supplies and other
agricultural products 2,663 - 58 7
------------ ---------- --------- ----------
Total segment expenditure for
additions to long-lived assets 2,663 2,884 390 47
9
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Year Ended December 31,
- ------------------------------------------------------------------------------------------------------
1996 1997 1998 1998
---- ---- ---- ----
(Rmb) (Rmb) (Rmb) (US$)
Reconciling item:
Corporate assets - - 700 85
------------ ---------- --------- ----------
Total consolidated expenditure for
additions to long-lived assets 2,663 2,884 1,090 132
============ ========== ========= ==========
</TABLE>
GENERAL
The main business of HARC and the Operating Subsidiaries is the
purchase and sale of natural rubber produced in Hainan. HARC and 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 209,000
tons in 1997 (a sales value of approximately Rmb1.9 billion (US$229 million) for
1997). The aggregate rubber output of the Hainan State Farms for the years 1993
to 1997 was 932,000 tons. Due to the continuous improvements of production and
plantation technology, the natural rubber output increased by over 30% from 1993
to 1997. It is anticipated that the natural rubber output of Hainan State Farms
will remain stable in the next few years.
In addition, HARC and the Operating Subsidiaries engage in the trading
of production materials and supplies and related commodities, such as fuels and
chemicals, including fertilizers and pesticides; and other products, including
farm equipment and machinery; and automobiles which are connected with the
agricultural production in Hainan. The foregoing materials are key elements in
the continuation of the Hainan State Farms' rubber production.
All of the Operating Subsidiaries' sourcing and trading activities are
divided into (1) State Plan allocations, and (2) free market activities. With
respect to State Plan allocations, the Central Government determines the price
and quantity of the materials and supplies sold to designated end users, and the
Operating Subsidiaries must strictly follow the allocation. However, the scale
of State Plan Allocations is decreasing gradually and currently accounts for
approximately 20% of the fuels and chemicals 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 fuels and chemicals, if any, is comparatively lower than that
derived from free market sales. With respect to natural rubber, although they
are provided through free market sales, the Operating Subsidiaries are
guaranteed a minimum gross profit margin of 3.5% (before purchase discount and
other adjustments) for sales of natural rubber purchased from the Hainan State
Farms. To the extent that the gross profit for a particular year is less than
this rate, the Farming Bureau is obligated to pay to the Operating Subsidiaries
the shortfall.
The combined net income before taxes of HARC and the Operating
Subsidiaries was Rmb92.4 million (US$11.2 million) in 1996, Rmb65.6 million
(US$7.9 million) in 1997 and the combined net loss before tax was Rmb37.0
million (US$4.6 million) in 1998.
RUBBER DISTRIBUTION
The Company, through HARC and the Operating Subsidiaries, engages in
the marketing and distribution of natural rubber purchased from 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.
10
<PAGE>
Natural rubber can only be planted in limited geographical regions in
the world. Today, most of the rubber plantations in the world are located in
South and Southeast Asia, which in 1996 accounted for over 90% of the world's
natural rubber output. According to China Statistical Yearbook 1998, China
ranked fifth in the world in terms of natural rubber output in 1996. China's
output accounted for 6.70%, 7.43% and 6.70% of the world's natural rubber output
in 1994, 1995 and 1996, 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.
<TABLE>
<CAPTION>
World Output of Natural Rubber by Country in 1996
-------------------------------------------------
Country or Region Tons
----------------- ----
(in thousands)
<S> <C>
Thailand 1,640
Indonesia 1,540
Malaysia 1,080
India 540
China 400
Vietnam 130
Sri Lanka 110
Nigeria 90
Ivory Coast 80
Philippines 60
Others 300
------
TOTAL 5,970
======
(Source: China Statistical Yearbook 1998)
</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 3.7 million MU
(approximately 604,000 acres or 950 square miles) in 1997, according to the
Statistical Yearbook of Hainan 1998.
The natural rubber output of the Hainan State Farms was approximately
209,000 tons in 1997, accounting for approximately 46% of the total domestic
output in China in 1997. It is anticipated that the natural rubber produced by
the Hainan State Farms will remain steady in the next few years.
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, HARC and the
Operating Subsidiaries determine the selling price according to market
conditions. However, the Operating Subsidiaries are guaranteed a minimum gross
profit margin of 3.5% by the Farming Bureau.
The natural rubber market has remained sluggish since the second half
year of 1997 due to the financial crisis in Southeast Asia. The average unit
price of domestic natural rubber in China was approximately Rmb9,400 (US$1,135)
per ton and Rmb7,000 (US$845) per ton in 1997 and 1998, respectively. 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 major rubber producing countries (such as Thailand,
Indonesia and Malaysia). In recent years, due to continuous weakening of rubber
consumption, especially in Japan and Korea, and the increasing supply from
certain major rubber producers in Asia, large amounts of natural rubber
inventory were accumulated. As a result, the average rubber price in the
international market dropped significantly from Rmb12,700 (US$1,534) per ton in
1996 to Rmb7,000 (US$845) per ton in 1998.
Since the second half year of 1997, the financial crisis in Southeast
Asia caused the Asian currencies to deflate against U.S. Dollars, while the
11
<PAGE>
Renminbi yuan remained relatively stable against U.S. Dollar. The currency
deflation of most of the largest natural rubber producing countries, like
Thailand, Indonesia and Malaysia, caused a significant drop in the international
rubber price by over 50% from the first half year of 1997 to the end of 1998.
The crisis also induced the rubber producing countries to increase their
exports. The increase in the worldwide supply of natural rubber further pushed
down the natural rubber price. Major Asian rubber exporting countries, such as
Thailand and Indonesia, have targeted China (the world's second largest consumer
of rubber and the third largest importer 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 430,000 tons and 400,000 tons of natural rubber in 1997 and 1998,
respectively. This large influx of natural rubber, coupled with the weak
domestic rubber consuming market in China, has caused the domestic rubber price
to drop significantly from 1996 to 1998. The average China domestic natural
rubber price per ton for years 1996, 1997 and 1998 were approximately Rmb12,700
(US$1,534), Rmb9,400 (US$1,135) and Rmb7,000 (US$845), respectively.
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; and (ii) under the
Long-Term Supply and Purchase Agreement between the Operating Subsidiaries and
the Farming Bureau, a minimum gross profit margin on distribution of natural
rubber of 3.5% was guaranteed by the Farming Bureau. 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. However, HARC and the Operating
Subsidiaries have temporarily ceased the trading of natural rubber commodity
futures contracts since the third quarter of 1998 in view of the high volatility
of futures market and the risk of potential default by futures counter-parties
due to the sharp decrease in market price of natural rubber in 1998. The
management expects that the Company's gross profit margin on the distribution of
natural rubber will be more vulnerable to the fluctuation of the domestic rubber
price.
Suppliers
HARC and the Operating Subsidiaries purchase natural rubber from the 92
farms comprising the Hainan State Farms, with the value of purchases totaling
approximately Rmb1,438 million (US$174 million) in 1996, Rmb1,012 million
(US$122 million) in 1997 and Rmb404 million (US$49 million) in 1998. The single
largest supplier within the Hainan State Farms accounted for approximately 3%
(RMB44.4 million, US$5.4 million) in 1996, 4% (Rmb42.2 million, US$5.1 million)
in 1997 and 14% (RMB55 million, US$6.6 million) in 1998. No single farm
accounted for more than 5% of the total purchases of natural rubber in any of
the years 1996 or 1997. The five largest suppliers accounted for 14%, 11%, 10%,
8% and 7%, respectively, of total purchases in 1998 (and no other supplier
accounted for more than 5%). All supplier farms are controlled by the Farming
Bureau. The top five supplier farms accounted for approximately 12% (Rmb168
million, US$20.3 million) in 1996, 18.5% (Rmb187 million, US$22.6 million) in
1997 and 50% (Rmb202 million, US$24 million) in 1998. 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.
12
<PAGE>
Marketing
The Hainan State Farms are the dominant suppliers of raw natural rubber
and natural rubber products in China. In 1997, they accounted for approximately
46% of the annual domestic 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.
HARC and the Operating Subsidiaries maintain a strong sales and
marketing force consisting of approximately 20 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. In 1998, due to the difficult market condition, the
Operating Subsidiaries tried to explore new targeted customers by increasing
their sales network and approaching targeted customers actively. 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
Net sales of natural rubber for 1996, 1997 and 1998 were Rmb1,519
million (US$183 million), Rmb1,104 million (US$133 million) and Rmb470 million
(US$57 million), respectively. The five largest customers for rubber, in the
aggregate, accounted for approximately 27%, 37% and 37% of the total revenue
derived from rubber sales for 1996, 1997 and 1998, respectively. The single
largest customer accounted for approximately 11% and 22% of such revenue for
1996 and 1997, respectively. No other single customer accounted for more than 5%
of total sales of natural rubber in either 1996 or 1997.
For the year ended December 31, 1998, HARC and the Operating
Subsidiaries had a total of approximately 500 customers for natural rubber and
natural rubber products. The largest four customers accounted for 10%, 10%, 6%
and 6%, respectively of total sales revenue for 1998. No other single customer
accounted for more than 5% of total sales of natural rubber in 1998.
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 in the first quarter. The harvest season commences in April and reaches
the peak during the second half of a year. The rubber output in the second half
year normally accounted for over 70% of the total annual rubber output. Sales of
natural rubber and natural rubber products generally are affected by such
seasonality factor. All sales in the first quarter of a year relate to inventory
maintained from the inventory of the prior year. Sales in the last two quarters
accounted for 61%, 59% and 60% of the total sales for 1996, 1997 and 1998,
respectively.
Distribution
HARC and the Operating Subsidiaries have their own warehouse facilities
and transportation fleet for both natural rubber and materials, consisting of 63
warehouses with a total area of 23,000 square meters, 60 trucks and 135 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. HARC and 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
HARC and the Operating Subsidiaries generally grant their purchasers
the right to return substandard natural rubber, as determined by laboratories
13
<PAGE>
recognized by both parties. Sales returns or losses borne by HARC and the
Operating Subsidiaries are reimbursed by the farm that supplied the substandard
rubber. These sales returns could potentially impact the working capital levels
of HARC and the Operating Subsidiaries if such returns were significant;
however, in the past such sales returns have been insignificant.
HARC and the Operating Subsidiaries have established a tight credit
control policy. For old and credit-worthy customers, sales of rubber were made
principally on an open account basis payable within one week, while the others
are made on a "cash on delivery" basis. HARC and the Operating Subsidiaries may
also 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. In addition, no sales are made to those customers with long
outstanding balances with HARC and the Operating Subsidiaries until past due
accounts receivable are settled.
However, in order to maintain good customer relationships, extended
payment terms may be granted to certain customers based on their credit and
payment history with HARC and the Operating Subsidiaries.
Due to the seasonal nature of rubber production, HARC and the Operating
Subsidiaries stockpile a certain amount of rubber inventory during the peak
production season for sales in those periods with no rubber output.
Pursuant to 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 assignments of
short term bank loans were effective upon approval of such banks on March 28,
1997 and March 31, 1997. As of September 30, 1996, the aggregate amounts 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 was 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
shares of these rubber producers are generally significantly less than that of
the Hainan 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.
<TABLE>
<CAPTION>
China Output of Natural Rubber by Region in 1997
------------------------------------------------
Region Tons
------ ----
<S> <C>
Hainan 269,991
Yunnan 153,966
Guangdong 25,746
Guangxi 2,033
Fujian 234
-------
TOTAL 451,970
=======
</TABLE>
(Source: China Statistical Yearbook 1998)
According to the China Statistical Yearbook 1998, the rubber output
from Hainan Province was 269,991 tons in 1997. According to the Statistical
14
<PAGE>
Yearbook of Hainan 1998, the rubber output from the Hainan State Farms was
208,585 tons in 1997. Consequently, the rubber output from non-state owned
enterprises in Hainan Province accounted for approximately 61,406 tons,
representing 23% of the total natural rubber output of Hainan Province in 1997.
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 producer is expected to
enter the market. Thus, the competition in the industry may be determined by the
acquisition of land suitable for rubber cultivation. Due to the favorable
climatic conditions in Hainan for rubber plantations and the fact that there is
still land available in Hainan that the Farming Bureau can develop into rubber
plantations, the Farming Bureau will likely remain as China's largest natural
rubber producer in 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 1998 and statistics
provided by the China Tropical Agriculture Institute, in 1997, the domestic
rubber output and rubber consumption were 452,000 tons and 820,000 tons,
respectively. Accordingly, the rubber output of the Farming Bureau in 1997
accounted for approximately 46% of the total domestic output of natural rubber
and satisfied approximately 25% of the domestic consumption. However, due to the
influx of imported natural rubber of approximately 550,000 tons in 1996 and
430,000 tons in 1997, the overall supply of natural rubber well exceeded demand,
which caused a large backlog of rubber inventory since 1996. Since the second
half year of 1997, the currency crisis in Southeast Asia caused the currencies
of most of the largest natural rubber producing countries, like Thailand,
Indonesia and Malaysia, to deflate against U.S. Dollars and also induced the
rubber producing countries to increase their exports. Competition from imported
rubber and the weak consumption market continued in 1998, which will affect the
Company's performance in the next few years.
Environmental Protection
Management does not believe that there are any material requirements
under PRC environmental law or regulations applicable to the Operating
Subsidiaries and HARC which could have a material adverse effect on 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 and HARC.
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 fuels and chemicals, including
fertilizers and pesticides; and other products, including farm equipment and
machinery; and automobiles, 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 were
33% in 1996, 29% in 1997 and 75% in 1998. Since 1996, the scope of procurement
of certain materials and supplies, such as building and construction materials,
iron and metals, and automobiles, has been reduced due to the slow down of
property and automobile markets (such customers are non-affiliates), and the
weak consumption market. Sales of fertilizers, pesticides, etc., which are
mainly sold to farms (affiliates) remained strong. The significant increase in
percentage of sales to non-affiliates in 1998 was due to the sales of barley to
non-affiliates during the year. There were no such sales in either 1996 or 1997.
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.
HARC and the Operating Subsidiaries generally do not maintain a
significant level of inventories, but instead locate suppliers and the necessary
products upon the receipt of orders. Management of HARC and 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 popular items, HARC and the Operating
Subsidiaries may maintain inventory levels sufficient to satisfy estimated
demand for one to three months.
15
<PAGE>
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
could request 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 could obtain quotes from other suppliers based on the same quantity
of the requested item. The Hainan State Farm might 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 an original
term of 15 years and, subject to applicable law, may not be terminated except
upon the agreement of the parties. The Sale and Purchase Agreement will expire
on November 5, 2009.
Suppliers
During 1998, HARC and the Operating Subsidiaries purchased production
materials and supplies from a total of approximately 120 suppliers. The value of
the total purchases of production materials and supplies was approximately
Rmb251 million (US$30.3 million) in 1996, Rmb37 million (US$4.5 million) in 1997
and Rmb57 million (US$6.9 million) in 1998. The single largest supplier
accounted for approximately 16% (Rmb39 million, US$4.7 million) in 1996, 34%
(Rmb13 million, US$1.4 million) in 1997 and 19% (Rmb11 million, US$1.3 million)
in 1998. The four largest suppliers accounted for 16%, 12%, 6% and 6%,
respectively, of such purchases in 1996, the five largest suppliers accounted
for 34%, 9%, 7%, 7% and 7%, respectively, of such purchases in 1997 and the six
largest suppliers accounted for 13%, 11%, 9%, 8%, 7% and 5%, respectively, of
such purchases in 1998 (and no other suppliers accounted for more than 5%). The
top five suppliers accounted for approximately 44% (Rmb111 million, US$13.4
million) in 1996, 65% (Rmb24 million, US$2.9 million) in 1997 and 52% (Rmb30
million, US$3.6 million) in 1998. 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
approximately 40 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, supplies and other agricultural products
by HARC and the Operating Subsidiaries for the years 1996, 1997 and 1998 totaled
approximately Rmb308 million (US$37.2 million), Rmb45 million (US$5.4 million)
and Rmb58 million (US$7.0 million), respectively. The five largest customers for
production materials and supplies accounted for approximately 37%, 8% and 74% of
the total revenue derived from sales of production materials and supplies for
1996, 1997 and 1998, respectively. The two largest customers accounted for 12%
and 9%, respectively, of such revenue in 1996, the single largest customers
accounted for less than 5%, of such revenue in 1997, and the largest six largest
16
<PAGE>
customers accounted for 29%, 21%, 8%, 8%, 7% and 6%, respectively, of such
revenue in 1998 (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. Aggregate sales to affiliates of the Farming Bureau
accounted for 67%, 71% and 25% of the total revenue derived from sales of
production materials and agricultural products for 1996, 1997 and 1998,
respectively.
Seasonality
The seasonal fluctuations experienced by the Operating Subsidiaries in
the production materials procurement operation are less severe than those
experienced in connection with the rubber distribution operation. 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 established a tight credit control
policy. Most of the sales to unaffiliated customers are on "cash on delivery"
terms. In addition, no sales are made to those unaffiliated 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 old customers based on their credit and payment history with the
Operating Subsidiaries. No extended payment terms are granted for more than one
month. For sales to the Hainan State Farms, more flexible payment terms may be
allowed depending on credit history and regularity of purchase orders. Such
payment terms may include an open account basis or the netting of the sales
value of materials against the cost of natural rubber purchases by the Operating
Subsidiaries.
Competitors
Generally, as a result of the Sale and Purchase Agreement, HARC and the
Operating Subsidiaries have few 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
competitions from certain suppliers owned and controlled by the Hainan
Provincial Government and from a number of smaller suppliers of production
materials and commodities in which the Operating Subsidiaries trade. Management
believes that the Operating Subsidiaries' market share is approximately 30% to
35%. Other suppliers which are owned and controlled by the Hainan Provincial
Government collectively have a market share of approximately 50% 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 HARC and the
Operating Subsidiaries:
<TABLE>
<CAPTION>
<S> <C> <C>
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
</TABLE>
The price and quality of products sold by the competitors are similar
17
<PAGE>
to that of the comparable products sold by HARC and the Operating Subsidiaries.
However, HARC and the Operating Subsidiaries can usually arrange more prompt
fulfillment of orders and shipment of goods due to their warehouse facilities
and transportation fleet. Also, HARC and 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 HARC and the Operating Subsidiaries in
the procurement segment, management does not believe that there are any material
requirements under PRC environmental laws or regulations applicable to HARC and
the Operating Subsidiaries which could have a material adverse effect on capital
expenditures, including capital expenditures required in order to comply with
environmental laws and regulation, in the procurement segment of the business of
HARC and the Operating Subsidiaries.
PRC LEGAL SYSTEM
The PRC legal system is based on the PRC Constitution and is made up of
written laws, regulations and directives. Decided court cases do not constitute
binding precedents.
The National People's Congress of the PRC ("NPC") and the Standing
Committee of the NPC are empowered by the PRC Constitution to exercise the
legislative power of the state. The NPC has the power to amend the PRC
Constitution and to enact and amend primary laws governing the state organs,
civil and criminal matters. The Standing Committee of the NPC is empowered to
interpret, enact and amend laws other than those required to be enacted by the
NPC.
The State Council of the PRC is the highest organ of state
administration and has the power to enact administrative rules and regulations.
Ministries and commissions under the State Council of the PRC are also vested
with the power to issue orders, directives and regulations within the
jurisdiction of their respective departments. Administrative rules, regulations,
directives and orders promulgated by the State Council and its ministries and
commissions must not be in conflict with the PRC Constitution or any national
laws. In the event that any conflict arises, the Standing Committee of the NPC
has the power to annul such administrative rules, regulations, directives and
orders.
At the regional level, the people's congresses of provinces and
municipalities and their standing committees may enact local rules and
regulations, and the people's government may promulgate administrative rules and
directives applicable to their own administrative area. These local laws and
regulations may not be in conflict with the PRC Constitution, any national laws
or any administrative rules and regulations promulgated by the State Council.
Rules, regulations or directives may be enacted or issued at the
provincial or municipal level or by the State Council of the PRC or its
ministries and commissions in the first instance for experimental purposes.
After sufficient experience has been gained, the State Council may submit
legislative proposals to be considered by the NPC or the Standing Committee of
the NPC for enactment at the national level.
The power to interpret laws is vested by the PRC Constitution in the
Standing Committee of the NPC. According to the Decision of the Standing
Committee of the NPC Regarding the Strengthening of Interpretation of Laws
passed on June 10, 1981, the Supreme People's Court has the power to give
general interpretation on application of laws in judicial proceedings apart from
its power to issue specific interpretation in specific cases. The State Council
and its ministries and commissions are also vested with the power to give
interpretation of the rules and regulations which they promulgated. At the
regional level, the power to give interpretations of the regional laws is vested
in the regional legislative and administration organs which promulgate such
laws. All such interpretations carry legal effect.
The people's courts are the judicial organs of the PRC. Under the PRC
Constitution and the Law of Organization of the People's Courts of the PRC, the
People's Courts are comprised of the Supreme People's Court, the local people's
18
<PAGE>
courts, military courts and other special people's courts. The local people's
courts are divided into three levels, namely, the basic people's courts,
intermediate people's courts and higher people's courts. The basic people's
courts are divided into civil, criminal and economic divisions. The intermediate
people's courts have divisions similar to those of the basic people's courts and
where the circumstances so warrant, may have other special divisions (such as
intellectual property divisions). The judicial functions of people's courts at
lower levels are subject to supervision of people's courts at higher levels. The
people's procuratorates also have the right to exercise legal supervision over
the civil proceedings of people's courts of the same and lower levels. The
Supreme People's Court is the highest judicial organ of the PRC. It supervises
the administration of justice by the people's courts of all levels.
The people's courts adopt a two-tier final appeal system. A party may,
before the taking effect of a judgment or order, appeal the judgment or order
first to a local people's court, then to the people's court at the next higher
level. Judgments or orders at the next higher level are final and binding.
Judgments or orders of the Supreme People's Court are also final and binding.
If, however, the Supreme People's Court or a people's court at a higher level
finds an error in a final and binding judgment which has taken effect in any
people's court at a lower level, or the presiding judge of a people's court
finds an error in a final and binding judgment which has taken effect in the
court over which he presides, a retrial of the case may be conducted according
to the judicial supervision procedures.
The PRC civil procedures are governed by the Civil Procedure Law of the
PRC (the "Civil Procedure Law") adopted on April 9, 1991. The Civil Procedure
Law contains regulations on the institution of a civil action, the jurisdiction
to the people's courts, the procedures in conducting a civil action, trial
procedures and procedures for the enforcement of a civil judgment or order. All
parties to a civil action conducted within the territory of the PRC must comply
with the Civil Procedure Law. A civil case is generally heard by a court located
in the defendant's place of domicile. The jurisdiction may also be selected by
express agreement by the parties to a contract provided that the jurisdiction of
the people's court selected has some actual connection with the dispute, that is
to say, the plaintiff or the defendant is located or domiciled or the contract
was executed or implemented in the jurisdiction selected, or the subject-matter
of the proceedings is located in the jurisdiction. A foreign national or foreign
enterprise is accorded the same litigation rights and obligations as a citizen
or legal person of the PRC. If any party to a civil action refuses to comply
with a judgment or order made by a people's court or an award made by an
arbitration body in the PRC, the aggrieved party may apply to the people's court
to enforce the judgment, order or award. There are time limits on the right to
apply for such enforcement. Where at least one of the parties to the dispute is
an individual, the time limit is one year. If both parties to the dispute are
legal persons or other entities, the time limit is six months.
A party seeking to enforce a judgment or order of a people's court
against a party who or whose property is not within the PRC may apply to a
foreign court with jurisdiction over the case for recognition and enforcement of
such judgment or order. A foreign judgment or ruling may also be recognized and
enforced according to PRC enforcement procedures by the people's courts in
accordance with the principle of reciprocity or if there exists an international
or bilateral treaty with or acceded to by the foreign country which provides for
such recognition and enforcement, unless the people's court considers that the
recognition or enforcement of the judgment or ruling will violate fundamental
legal principles of the PRC and its sovereignty, security or social or public
interest.
The Arbitration Law of the PRC (the "Arbitration Law") was promulgated
by the Standing Committee of the NPC on August 31, 1994 and came into effect on
September 1, 1995. It is applicable to, among other matters, trade disputes
involving foreign parties where the parties have entered into a written
agreement to refer the matter to arbitration before an arbitration committee
constituted in accordance with the Arbitration Law. Under the Arbitration Law,
an arbitration committee may, before the promulgation by the PRC Arbitration
Association of arbitration regulations, formulate interim arbitration rules in
accordance with the Arbitration Law and the Civil Procedure Law. Where the
parties have by an agreement provided arbitration as a method for dispute
resolution, the parties are not permitted to institute legal proceedings in a
people's court.
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 with branches in Shenzhen and Shanghai, 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
19
<PAGE>
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".
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.
Under the Arbitration Law, an arbitral award is final and binding on
the parties and if a party fails to comply with an award, the other party to the
award may apply to the people's court for enforcement. A people's court may
refuse to enforce an arbitral award made by an arbitration commission if there
were mistakes, an absence of material evidence or irregularities over the
arbitration proceedings or the jurisdiction or constitution of the arbitration
committee.
A party seeking to enforce an arbitral award of a foreign affairs
arbitration body of the PRC against a party who or whose property is not within
the PRC may apply to a foreign court with jurisdiction over the case for
enforcement. Similarly, an arbitral award made by a foreign arbitration body may
be recognized and enforced by the PRC courts in accordance with the principles
of reciprocity or any international treaty concluded or acceded to by the PRC.
In respect to contractual and non-contractual commercial-law-related disputes
which are recognized as such for the purposes of the PRC laws, the PRC has
acceded to the Convention on the Recognition and Enforcement of Foreign Arbitral
Awards (the "New York Convention") adopted on June 10, 1958 pursuant to a
resolution of the Standing Committee of the NPC passed on December 2, 1986. The
New York Convention provides that all arbitral awards made by a state which is a
party to the New York Convention shall be recognized and enforced by other
parties to the New York Convention subject to their right to refuse enforcement
under certain circumstances including where the enforcement of the arbitral
award is against the public policy of the state to which the application for
enforcement is made. It was declared by the Standing Committee of the NPC at the
time of the accession of the PRC that (1) the PRC will only recognize and
enforce foreign arbitral awards on the principle of reciprocity and (2) the PRC
would only apply the New York Convention in disputes considered under PRC laws
to be arising from contractual and non-contractual mercantile legal relations.
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.
[Item 2] PROPERTIES
The Company does not own any real property with respect to its
operations. The office space, warehouse and other facilities of HARC and 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 23,000 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
20
<PAGE>
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.
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 offices are located. Such
rental agreement is for a period of 10 years at an annual rental of Rmb170,240
(US$20,560) 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. 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$8,696).
[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, 1998.
[Item 4] SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS
On December 15, 1998, 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 November 30, 1998, 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. the election of Ching Lung Po (5,241,678 votes for, 2,450 votes
withheld,19,328 abstentions) and Lin Yu Quan (5,240,678 votes for,
3,450 votes withheld, 19,328 abstentions) to serve as directors in
Class II; and,
2. the ratification of the appointment of Ernst & Young as the
Company's independent accountants for the fiscal year ending December
31, 1998 (5,251,141 votes for, 10,110 votes against, 2,205
abstentions).
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, 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
21
<PAGE>
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 1997 and 1998.
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 either from the monthly statistical report
provided to the Company by The Nasdaq Stock Market or Bloomberg Business News:
<TABLE>
<CAPTION>
Period High Bid Low Bid
------ -------- -------
<S> <C> <C>
1998 Fiscal Year, quarter ended:
March 31, 1998..................... $2.56 $1.94
June 30, 1998...................... 2.88 1.50
September 30, 1998................. 1.63 0.94
December 31, 1998.................. 1.06 0.50
1997 Fiscal Year, quarter ended:
March 31, 1997..................... $3.75 $1.75
June 30, 1997...................... 4.69 2.50
September 30, 1997................. 4.25 3.13
December 31, 1997.................. 3.94 1.50
</TABLE>
On March 18, 1999, there were 230 holders of record of the Company's
Common Stock.
The Company has not paid any dividends with respect to its Common Stock
and has no present plan to pay any dividends in the foreseeable future. The
Company intends to retain its earnings to support the growth and expansion of
its business.
Any dividends paid in the future by the Company will be paid at the
discretion of the Company's Board of Directors and will be dependent upon
distributions, if any, made by the Operating Subsidiaries through HARC to the
Company's wholly-owned subsidiary, Billion Luck. Applicable PRC law and HARC's
Articles of Association (the "Articles") require that, before HARC, as a limited
joint stock company, distributes profits to investors, it must (1) satisfy all
taxes; (2) provide for all losses incurred in previous years; and (3) allocate a
specified percentage of remaining profits to each of the following: a surplus
reserve (in the amount of 10% of such remaining profits), a collective welfare
fund (in the amount of 10% of such remaining profits), and an incentive fund (in
an amount between 5% and 10% of such remaining profits). The Articles provide
that the foregoing may be adjusted by the HARC'S board of directors based upon
HARC's business performance and development needs, subject to the approval of
HARC's shareholders. Distributions of profits by the Operating Subsidiaries to
HARC, and by HARC to Billion Luck are required to be pro rata in proportion to
such party's investment in such company. In addition to the foregoing, any
future determination to pay a dividend to holders of shares of Common Stock will
depend on the Company's results of operations, its financial condition and other
factors deemed relevant by the Board of Directors. Since the acquisition of
Billion Luck by the Company in December, 1994, the Company has not received any
distributions from any of its subsidiaries and has not made any distributions to
its shareholders.
[Item 6] SELECTED FINANCIAL DATA
The following table sets forth selected financial data of the Company
and its subsidiaries. The selected historical consolidated financial data in the
table for the Company's five fiscal years ended December 31, 1994, 1995, 1996,
1997 and 1998, are derived from the consolidated financial statements elsewhere
herein. The selected pro forma financial data in the table for the Company's
fiscal years ended December 31, 1994, are derived from the unaudited pro forma
consolidated financial information included elsewhere herein. The data should be
read in conjunction with, and qualified in their entirety by reference to,
"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.
22
<PAGE>
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
In Thousands, Except Per Share Amounts
Year Ended December 31,
1994 1994 1995 1996 1997 1998 1998
(Rmb) (Rmb) (Rmb) (Rmb) (Rmb) (Rmb) (U.S. $)
---------------------------------------------------------------------------------------
(Pro forma) (Historical)(Historical)(Historical)(Historical) (Historical) (Historical)
<S> <C> <C> <C> <C> <C> <C> <C>
Income Statement Data
Net sales 1,754,288 1,308,248 1,957,243 1,827,499 1,149,171 527,692 63,731
Cost of sales (1,686,944) (1,263,309) (1,851,186) (1,677,056) (1,092,972) (510,631) (61,670)
---------- ---------- ---------- ---------- ----------- --------- --------
Gross Profit 67,344 44,939 106,057 150,443 56,199 17,061 2,061
Depreciation (1,981) (1,129) (2,820) (1,813) (1,429) (1,343) (162)
Provision for
doubtful accounts - - - - - (4,740) (572)
Loss on impairment of
an investment - - - - - (49,969) (6,035)
Selling, general and
administrative
expenses (39,403) (24,627) (54,442) (50,488) (32,934) (35,419) (4,278)
Financial income/
(expense), net 9,613 2,568 (33,212) (19,870) 145 6,590 796
Reorganization
expenses - (3,029) - - - - -
Other income, net 8,216 5,612 28,654 6,054 30,580 4,070 491
---------- ---------- ---------- ---------- ----------- --------- --------
Income/(loss) before
income taxes 43,789 24,334 44,237 84,326 52,561 (63,750) (7,699)
Income taxes (6,564) (3,663) (6,909) (13,991) (9,798) - -
---------- ---------- ---------- ---------- ----------- --------- --------
Income/(loss) before
minority interests 37,225 20,671 37,328 70,335 42,763 (63,750) (7,699)
Minority interests (16,341) (10,389) (18,153) (34,513) (24,563) 11,079 1,338
---------- ---------- ---------- ---------- ----------- --------- --------
Net income/(loss) 20,884 10,282 19,175 35,822 18,200 (52,671) (6,361)
========== ========== ========== ========== =========== ========= ========
Basic earnings/(loss)
per share* 17.40 8.57 15.98 10.14 3.05 (8.79) (1.06)
========== ========== ========== ========== =========== ========= ========
Diluted earnings/(loss)
per share* 17.40 8.57 15.49 10.02 3.04 (8.79) (1.06)
========== ========== ========== ========== =========== ========= ========
Other financial data
Income/(loss) before
income taxes, minority
interests, depreciation and
amortization 45,770 25,463 47,085 86,166 54,018 (62,380) (7,534)
========== ========== ========== ========== =========== ========= ========
Balance sheet data
Current assets 480,235 480,235 633,958 685,216 281,692 243,188 29,370
Working capital 65,808 68,709 143,986 301,474 217,927 167,851 20,272
Total assets 533,305 533,305 668,488 705,113 437,880 370,726 44,773
Current liabilities 414,427 411,526 489,972 383,742 63,765 75,337 9,098
Long-term liabilities 54,075 54,075 - - - - -
Minority interests 51,609 55,914 74,067 108,580 133,143 107,945 13,037
Total liabilities and
minority interests 520,111 521,515 564,039 492,322 196,908 183,282 22,135
Shareholders' equity 13,194 11,790 104,449 212,791 240,972 187,444 22,638
</TABLE>
23
<PAGE>
o The earnings per share information for the periods presented represents
earnings/(loss) per share of the Company as if the reverse stock splits
in 1994 and 1996 had been completed at the beginning of the respective
periods.
o The computation of diluted earnings/(loss) per share did not assume the
conversion of the stock option in 1998 and 1997 and the warrants in
1998 because their inclusion would have been antidulutive.
[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, 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 which controls a 61% interest
in HARC (56% interest of HARC is owned by Billion Luck, a wholly-owned British
Virgin Islands subsidiary of the Company, and a 5% interest of HARC was acquired
by the Company directly on April 30, 1998 pursuant to an Agreement for the Sale
and Purchase of Share in HARC between Guilinyang Farm and the Company), a
limited liability joint stock company organized in the PRC which 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 commodity futures contracts. Pursuant to an Agreement
for the Sale and Purchase of Share in HARC dated April 30, 1998, between
Guilinyang Farm and the Company, the Company purchased 5,000,000 shares,
representing 5%, of the total issued and outstanding share capital of HARC from
Guilinyang Farm for consideration of Rmb7 million (US$0.85 million). After the
said purchase, the Company's effective interest in HARC became 61%.
The Statements under "Results of Operations" and "Liquidity and Capital
Resources" relate to the operations and financial 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 the 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 commodity futures contracts to hedge the price risk associated
with existing rubber inventory and certain firm commitments for the purchase of
natural rubber. As opportunities arise, the Operating Subsidiaries also enter
into natural rubber commodity 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. However, HARC and the Operating Subsidiaries have temporarily ceased
the trading of natural rubber commodity futures contracts since the third
quarter of 1998 in view of the high volatility of the futures market and the
risk of potential default by futures counter-parties due to the sharp decrease
in market price in 1998. They also procure certain production materials and
supplies which include fertilizers, fuels, chemicals, farm equipment and
machinery, and automobiles 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.
24
<PAGE>
HARC and the Operating Subsidiaries determine the selling price of
natural rubber according to market conditions. However, the Operating
Subsidiaries are guaranteed a minimum gross profit margin of 3.5% on natural
rubber purchased from the Hainan State Farms by the Farming Bureau. 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 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 certain short term bank
loans, as part of the corporate restructuring plan. The assignment of the
amounts due from farms and affiliates of the Farming Bureau was effective on
October 1, 1996, and the assignments of short term bank loans were effective
upon approval of such banks on March 28, 1997 and March 31, 1997. 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$35
million). According to the Restructuring Agreements, the Farming Bureau was
responsible for the payment of interest incurred on the bank loans after
September 30, 1996.
Results of Operations
The following table shows the selected consolidated income
statement data of the Company and its subsidiaries for the three fiscal years
ended December 31, 1996, 1997 and 1998. The data should be read in conjunction
with, and qualified in their entirety by reference to, the Consolidated
Financial Statements of the Company and related Notes thereto and other
financial information included elsewhere therein:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Year Ended December 31,
(In thousands) 1996 1997 1998 1998
(Rmb) (Rmb) (Rmb) (U.S.$)
- ---------------------------------------------------------------------------------------------------------
(Historical) (Historical) (Historical) (Historical)
<S> <C> <C> <C> <C>
Net sales:
Distribution of natural rubber 1,519,060 1,104,145 470,073 56,772
Procurement of materials and supplies
and distribution of other agricultural
products 308,439 45,026 57,619 6,959
------------- ------------- ------------ -------------
1,827,499 1,149,171 527,692 63,731
Gross profit 150,443 56,199 17,061 2,061
Gross profit margin 8.2% 4.9% 3.2% 3.2%
Income/(loss) before income taxes 84,326 52,561 (63,750) (7,699)
Income taxes (13,991) (9,798) - -
------------- ------------- ------------ -------------
Net income/(loss) before minority interests 70,335 42,763 (63,750) (7,699)
Minority interests (34,513) (24,563) 11,079 1,338
------------- ------------- ------------ -------------
Net income/(loss) 35,822 18,200 (52,671) (6,361)
============= ============= ============ =============
</TABLE>
25
<PAGE>
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Sales and Gross Profit
Total net sales for the year ended December 31, 1998, decreased by
Rmb621 million (US$75.0 million) or 54% to Rmb528 million (US$63.8 million),
compared to Rmb1,149 million (US$138.8 million) for the corresponding period in
1997. Net sales of natural rubber declined by Rmb634 million (US$76.6 million)
or 57.4% to Rmb470 million (US$56.7 million), compared to Rmb1,104 million
(US$133.3 million) for the corresponding period in 1997. Net sales revenue for
the procurement of materials and supplies increased by Rmb13 million (US$1.6
million) or 28.0% to Rmb58 million (US$7.0 million), compared to Rmb45 million
(US$5.4 million) for the corresponding period in 1997.
The decline in natural rubber sales was due to the decrease in average
natural rubber price from approximately Rmb9,300 (US$1,123) per ton in 1997 to
approximately Rmb7,000 (US$845) per ton in 1998, and the decrease in sales
quantity in 1998 as compared with the corresponding period in 1997. The
decreases in rubber price and unit sales were due to the keen competition from
overseas suppliers, the currency deflation of most rubber producing countries
such as Thailand, Indonesia and Malaysia, and an overall decrease in domestic
demand. The gradual decrease in PRC import tariff has made imported rubber more
attractive to domestic customers due to a decrease in price difference between
domestic and imported rubber. In addition, in order to foster the growth of
certain state-owned enterprises involved in the manufacturing of rubber related
products, the PRC government has granted various tariff exemptions to them.
Together with the favourable credit terms provided by overseas suppliers, many
customers have switched to imported rubber, which caused a significant decrease
in domestic demand of natural rubber.
The increase of net sales from procurement of materials and supplies
was mainly due to the sales of barley of Rmb29 million (US$3.5 million) during
1998. This was a one-off transaction, as this product was not profitable and the
management decided to suspend the trading of this product. However, this
increase was partly offset by the reduction of sales of production materials due
to intense competition from other suppliers located in the proximity to various
rubber farms and the sluggish consumption market.
Gross profits decreased by Rmb39 million (US$4.7 million) or 69.6% to
Rmb17 million (US$2.1 million) in 1998 from Rmb56 million (US$6.8 million) in
1997. The overall gross profit margin also decreased from 4.9% in 1997 to 3.2%
in 1998. The decrease was mainly due to a lower gross profit margin achieved by
HARC, which was not subject to the 3.5% profit guarantee by the Farming Bureau,
and the gross loss of Rmb2 million (US$242,000) arising from the sale of barley.
Loss on Impairment of an Investment
For the year ended December 31. 1998, the Company wrote-down, in
aggregate, of Rmb50 million (US$6.0 million) against a long-term investment and
an investment purchase deposit in a PRC listed company, due to an adverse change
in the business environment in the PRC.
Selling and Administrative Expenses
Selling and administrative expenses increased by Rmb2.5 million
(US$302,000) or 8% to Rmb35.4 million (US$4.3 million) in 1998 from Rmb32.9
million (US$4.0 million) in 1997. This was primarily due to the expansion of the
Company's sales network during 1998 and the write-off of margin deposits paid to
two futures brokers after the closure of China Commodity Futures Exchange in
Hainan during the third quarter of 1998.
Financial Income/(Expenses), Net
The increase in net financial income from Rmb145,000 (US$18,000) in
1997 to Rmb6.5 million (US$785,000) in 1998 was mainly due to the increase in
cash and cash equivalents after the withdrawal of futures margin deposits, and
there was an interest expense of Rmb2 million (US$242,000) in 1997 on a
temporary advance for the acquisition of a long term investment.
26
<PAGE>
Other Income, Net
Other income decreased by Rmb26.5 million (US$3.2 million) or 87% to
Rmb4.1 million (US$495,000) in 1998 from Rmb30.6 million (US$3.7 million) in
1997. This significant decrease was primarily due to the decrease in gains on
trading of rubber futures contracts for non-hedging purposes. The Company has
ceased the trading of rubber futures contracts since the third quarter of 1998
as a result of the increased volatility of the futures market and the reduction
of natural rubber demand in the open market.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Sales and Gross Profit
Total net sales for the year ended December 31, 1997, decreased by
Rmb678 million (US$81.9 million) or 37% to Rmb1,149 million (US$138.8 million),
compared to Rmb1,827 million (US$220.7 million) for the corresponding period in
1996. Net sales of natural rubber declined by Rmb415 million (US$50.1 million)
or 27.3% to Rmb1,104 million (US$133.3 million), compared to Rmb1,519 million
(US$183.5 million) for the corresponding period in 1996. Net sales revenue for
the procurement of materials and supplies decreased significantly by Rmb263
million (US$31.8 million) or 85.4% to Rmb45 million (US$5.4 million), compared
to Rmb308 million (US$37.2 million) for the corresponding period in 1996.
The decline in natural rubber sales was mainly due to the decrease in
average natural rubber price from approximately Rmb12,700 (US$1,534) per ton in
1996 to approximately Rmb9,600 (US$1,159) per ton in 1997, while the sales
quantity remained relatively stable in 1997 as compared with the corresponding
period in 1996. The decline in rubber price was primarily the result of the keen
competition from overseas suppliers. As previously discussed, the outbreak of
currency crisis in the Southeast Asia since the second half year of 1997 caused
a significant currency deflation of most Asian currencies against U.S. Dollars,
including the largest natural rubber producing countries like Thailand,
Indonesia and Malaysia, while the exchange rate of Renminbi against U.S. Dollars
remained relatively stable in 1997. This currency deflation caused a significant
decline in the international rubber price by approximately 40% during 1997. The
weak domestic consumption market together with the influx of imported rubber
caused the overall domestic supply of natural rubber to exceed demand.
Net sales from procurement of materials and supplies dropped
significantly because of the weak consumption market in 1997. Following the
completion of private offshore placements during 1996, the Company had 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 in 1996. The net sales of such activity amounted to Rmb241
million (US$29.1 million) in 1996 with a gross profit margin of approximately
33%. In 1997, the Company has decided to reduce the scope in trading of other
agricultural products in view of the weak consumption market and high volatility
of the prices of such products. The Company also has determined to reduce the
scope of trading of certain production materials and supplies, such as
construction materials, machinery and automobiles, because of unsatisfactory
historical profit margin contribution.
Gross profits decreased by Rmb94 million (US$11.4 million) or 62.6% to
Rmb56 million (US$6.8 million) in 1997 from Rmb150 million (US$18.1 million) in
1996. The overall gross profit margin also decreased from 8.2% in 1996 to 4.9%
in 1997. The decrease was primarily attributable to the reduction in scope of
trading of other agricultural products which had high gross margin contribution
in 1996. The gross profit margin on natural rubber distribution was 4.6% in 1997
compared to 4.1% in 1996. The increase was due to compensation received from
customers who defaulted in fulfilling their purchase agreements.
Selling and Administrative Expenses
Selling and administrative expenses decreased by Rmb18 million (US$2.2
million) or 35% to Rmb32.9 million (US$4.0 million) in 1997 from Rmb50.5 million
(US$6.1 million) in 1996. This was primarily due to the successful
implementation of the corporate restructuring and cost control measures in order
to reduce administrative overhead, staff costs and related expenses pursuant to
the Restructuring Agreements effective on October 1, 1996.
27
<PAGE>
Financial Income/(Expenses), Net
The net financial expenses changed from a net expense of Rmb20 million
(US$2.4 million) in 1996 to a net income of Rmb145,000 (US$18,000) in 1997. This
significant reduction of financial expenses was primarily attributable to the
assignment of bank loans to Farming Bureau which were effective upon the
approval of such banks in March 1997, pursuant to the Restructuring Agreements
effective on October 1, 1996. According to the Restructuring Agreements, the
Farming Bureau was responsible for the payment of interest incurred on the bank
loans after September 30, 1996.
Other Income, Net
Other income increased by Rmb24.5 million (US$3.0 million) or 405% to
Rmb30.6 million (US$3.7 million) in 1997 from Rmb6.1 million (US$737,000) in
1996. This significant increase was primarily due to the increase in profit from
the trading of commodity futures contracts for non-hedging purposes. A profit on
the trading of commodity futures of Rmb28.4 million (US$3.4 million) was
recorded for the year 1997, compared to a profit of only Rmb1.4 million
(US$169,000) for the year 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Operating Subsidiaries' primary liquidity needs are to fund
accounts receivable, inventories and, to a lesser extent, to expand business
operations. The Operating Subsidiaries have financed their working capital
requirements through the internally generated cashflows.
Net cash provided by/(used in) operating activities was Rmb130 million,
(Rmb3 million) and Rmb35 million in fiscal 1996, 1997 and 1998, 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 Operating Subsidiaries do not have outstanding bank loans as at
December 31, 1998. The outstanding short term bank loans as at December 31, 1996
were assumed by the Farming Bureau upon the approval of such banks on March 28,
1997 and March 31, 1997. According to the Restructuring Agreements, the Farming
Bureau was responsible for the payment of interest incurred on the bank loans
after September 30, 1996.
The Farming Bureau has guaranteed the recoverability of current
accounts receivable from the Hainan State Farms and other related companies
controlled and owned by the Farming Bureau.
The Company believes that the internally generated funds will be
sufficient to satisfy its anticipated working capital needs for at least the
next 12 months.
Inflation
As a measure to control inflation, the PRC government has reinstated
controls on bank credits, limits on loans for fixed assets and restrictions on
state bank lending. This austerity plan, first announced in June 1993, seems to
have been relaxing during the first half of 1996. There is no assurance that the
austerity program will be completed in the proximate future, nor any assurance
that if it were terminated it might not be later reinstated. While inflation has
moderated since 1994, with the national retail inflation rate falling to 14.8%
6.1% and 0.8% per annum in 1995 1996 and 1997, respectively, there can be no
assurance that inflation will not increase in the future or that further
measures to combat inflation and speculative activities will not be implemented
in a manner that may adversely affect the profitability of the Operating
Subsidiaries and HARC over time.
28
<PAGE>
Impact of Recently Issued Accounting Standards and Other Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"), which is required to be
adopted in years beginning after June 15, 1999. SFAS permits early adoption as
of the beginning of any fiscal quarter after its issuance. The Company expects
to adopt SFAS 133 effective January 1, 2000. SFAS 133 will require the Company
to recognize all derivatives on the balance sheet at fair value. Derivatives
that are not hedges must be adjusted to fair value through income. If a
derivative is a hedge, depending on the nature of the hedge, changes in the fair
value of the derivative will either be offset against the change in fair value
of the hedged asset, liability, or firm commitment through earnings, or
recognized in other comprehensive income until the hedged item is recognized in
earnings. The ineffective portion of a derivative's change in fair value will be
immediately recognized in earnings. The Company has not yet determined what the
effect of SFAS 133 will be on the earnings and financial position of the
Company.
In March 1998, the American Institute of Certified Public Accountants
issue Statement of Position 98-1 "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" ("SOP 98-1"), which is effective for
fiscal years beginning after December 15, 1998. The Company plans to adopt SOP
98-1 on January 1, 1999. SOP 98-1 will require the capitalization of certain
costs incurred after the date of adoption in connection with developing or
obtained software for internal use. The Company currently expenses such costs as
incurred. The Company does not anticipate that the adoption of SOP 98-1 will
have a significant effect on its results of operations or financial position.
Market Risk and Risk Management Policies
All of the sales and purchases of HARC and the Operating Subsidiaries
are made domestically and are denominated in Renminbi. Accordingly, HARC and the
Operating Subsidiaries do not have material market risk with respect to currency
fluctuation. As the reporting currency of the Company's consolidated financial
statements is also Renminbi, there is no significant translation difference
arising on consolidation.
The Company's interest income is most sensitive to changes in the
general level of Renminbi interest rates. In this regard, changes in Renminbi
interest rates affect the interest earned on the Company's cash equivalents. As
at December 31, 1998, the Company's cash equivalents are mainly Renminbi
deposits with financial institutions, bearing market interest rates without
fixed term.
Since 1996, the Company's board of directors has adopted a risk
management resolution authorizing the management to enter natural rubber
commodities futures contracts for hedging the price risk associated with certain
firm commitments for the purchase of natural rubber. The Company also trades
natural rubber commodity futures contracts which are not specific hedges. As at
December 31, 1998, the Company had neither a position in natural rubber
commodity futures contracts, nor firm commitments for the purchase of natural
rubber.
Year 2000 Issue
The Year 2000 issue is the result of information technology systems and
embedded systems (products which are made with microprocessor (computer) chips
such as HVAC systems, physical security systems and elevators) using a two-digit
format, as opposed to four digits, to indicate the year. Such information
technology and embedded systems may be unable to properly recognize and process
date-sensitive information beginning January 1, 2000. This could result in a
system failure or miscalculations causing disruptions of operations, including,
among other things, a temporary inability to process transactions, send
invoices, or engage in similar normal business activities.
The Company's State of Readiness
- --------------------------------
The Company and its subsidiaries use a limited amount of computer
software primarily in connection with their accounting and financial reporting
systems. Such programs are in the process of being upgraded so that they are
year 2000 compatible.
29
<PAGE>
In addition to software issues, certain of the computer hardware of the
Company and its subsidiaries may need to be replaced with more current
technology. The Company is currently in the process of determining the extent to
which its and its subsidiaries' hardware and other embedded chip equipment and
facilities is not year 2000 compatible, however, neither the Company nor its
subsidiaries maintains a significant amount of computer hardware or other
equipment or facilities which utilize embedded chip technology.
The Costs to Address the Company's Year 2000 Issues
- ---------------------------------------------------
The Company has identified that its and its subsidiaries' accounting
and related software will require upgrading in order to become year 2000
compatible and is currently in the process of initiating those upgrades.
Management does not believe that the costs of upgrading such software will be
material.
The Company is in the process of identifying which of its and its
subsidiaries' hardware and other equipment and facilities utilizes embedded chip
technology which is not year 2000 compatible. Neither the Company nor its
subsidiaries maintains a significant amount of computer hardware or other
embedded systems, and management believes that the costs of identifying and
correcting potential year 2000 hardware and embedded system problems will not be
material, even if such hardware and embedded systems require replacement.
Based on the limited use of computer software, hardware and embedded
systems by the Company and its subsidiaries, the progress the Company and its
subsidiaries have made in identifying and addressing their year 2000 issues, and
the Company's plan and timeline to complete the compliance program, management
does not foresee significant risks associated with Year 2000 compliance by the
Company and its subsidiaries at this time. The Company believes that the costs
directly associated with the year 2000 issue will be less than US$20,000 and
that all required upgrades and replacements will be completed prior to the end
of the third quarter of 1999.
Customer, Supplier and Other Third Party Year 2000 Issues
- ---------------------------------------------------------
The Company has material third party relationships with it suppliers,
customers, financial institutions and other third parties with which it conducts
business. If any of these third parties suffer year 2000 deficiencies or
failures, such occurrences could have a material, adverse effect on the Company
and the operation of its business. Accordingly, management has requested and is
evaluating documentation from the Company's significant suppliers and customers,
financial institutions and other third parties relating to their Year 2000
compliance plans. At this time, management has not yet received sufficient
certifications to be assured that such suppliers, customers, financial
institutions, and other third parties have fully considered and mitigated any
potential material impact of the year 2000 deficiencies. Therefore, management
does not, at this time, know of the potential costs to the Company or its
subsidiaries of any adverse impact or effect of any year 2000 deficiencies by
these third parties.
The Risks of the Company's Year 2000 Issues and Contingency Plans
- -----------------------------------------------------------------
Although Company believes that its internal exposure to the year 2000
issue is limited and that its remediation efforts will be successful in
addressing its year 2000 issues, there can be no assurance that such remediation
efforts will be successful or that its upgraded software or any newly installed
systems will be fully year 2000 compatible. At this time, the Company is unable
to accurately predict the consequences of failed remediation efforts or a
failure of the Company's upgraded software or new systems to effectively address
the year 2000 issue, although management does not believe that any such failures
will result in a material, adverse effect on the Company or its subsidiaries, or
the operation of their business.
Any failure of the software or systems of the suppliers, customers,
financial institutions or other third parties with which the Company or its
subsidiaries conducts business to address their year 2000 issues could impair
the Company's ability to perform normal operational functions. Because the
Company is still evaluating the status of the systems of the third parties with
which the Company and its subsidiaries conducts business, management has not yet
developed a comprehensive contingency plan and is unable to identify "the most
reasonably likely worst case scenario" at this time. As management identifies
significant risks related to these issues, management will develop appropriate
contingency plans.
30
<PAGE>
Quarterly Results of Operations
The following is a summary of the quarterly results of operations for
the years ended December 31, 1998 and 1997.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
(In thousands, except share and per share March 31 June 30 September 30 December 31
data) (Rmb) (Rmb) (Rmb) (Rmb)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1998:
Net sales 93,227 120,140 155,122 159,203
Cost of sales 90,324 113,680 148,944 157,683
Net income/(loss) (5,475) 1,841 (462) (48,575)
Earnings/(loss) per common share:
Basic (0.91) 0.31 (0.08) (8.11)
Diluted (0.91) 0.31 (0.08) (8.11)
1997:
Net sales 109,398 365,069 419,295 255,409
Cost of sales 101,118 348,557 410,396 232,901
Net income 3,381 6,735 8,778 (694)
Earning/(loss) per common share:
Basic 0.59 1.12 1.46 (0.12)
Diluted 0.59 1.12 1.46 (0.13)
</TABLE>
31
<PAGE>
The computation of diluted earnings/(loss) per share did not assume the
conversion of the stock options in 1998 and 1997 and the warrants in 1998
because their inclusion would have been antidilutive.
[Item 8] FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Consolidated Financial Statements for the three fiscal
years ended December 31, 1998, 1997 and 1996 are included herewith as Appendix A
and incorporated herein by reference.
[Item 9] CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
[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 March 31, 1999, and the ages of and positions with
the Company held by each of such persons:
<TABLE>
<CAPTION>
Age Position
--- --------
<S> <C> <C>
Ching Lung Po 52 Chairman of the Board of Directors, Chief Executive Officer
Lin Yu Quan 51 Vice Chairman of the Board of Directors
Li Shunxing 48 Director and President
Tam Cheuk Ho 36 Director and Chief Financial Officer
Wong Wah On 35 Director, Secretary and Financial Controller
Wan Ying Lin 50 Director
Ng Kin Sing 37 Director
</TABLE>
Mr. Ching Lung Po has been a director of the Company since February 4,
1998, and was appointed Chairman of the Board of Directors on January 25, 1999
and Chief Executive Officer of the Company on February 1, 1999. Mr. Ching also
has been the Chairman of the Board of Directors and President of OVM
International Holding Corp. (OTC Bulletin Board: OVMI), which is included on the
OTC Bulletin Board operated by the Nasdaq, since September 1996, and the
Chariman of Harbin Asibao Chemical Fiber Company Limited since October 1995. Mr.
Ching has been involved for more than 20 years in the management of production
and technology for industrial enterprises in PRC. He worked in Heilongjiang
Suihua Electronic Factory as an engineer from 1969 to 1976 and was the Head of
the Heilongjiang Suihua Industrial Science & Technology Research Institute from
1975 to 1976. Mr. Ching joined the Heilongjiang Qingan Factory in 1976 and has
been the General Manager since 1976. In 1988, Mr. Ching started his own business
and established the Shenzhen Hongda Science & Technology Company Limited in
Shenzhen, which manufactures electronic products. Mr. Ching is graduated from
the Harbin Military and Engineering Institute and holds the title of Senior
Engineer.
32
<PAGE>
Mr. Lin Yu Quan has been a Director and Vice Chairman of the Company
since July 20, 1998. He is also the Chairman of HARC. Mr. Lin is a graduate of
the School of Central Communist Party with a major in economic development. From
July, 1984 to July, 1989, he was the Deputy Mayor of Dan County of the Hainan
Province. From August, 1989 to July, 1996, Mr. Lin was the Mayor and Secretary
of the Communist Party of Wanning County. From July, 1996 to December, 1997, he
served as the Mayor of the Wanning City. In January, 1998, Mr. Lin was appointed
the Director of the Hainan Farming Bureau.
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. Tam Cheuk Ho has been a Director and the Chief Financial Officer of
the Company since December, 1994. Prior to joining the Company, from July, 1984
through January, 1992, he worked as Audit Manager at Ernst & Young, Hong Kong,
and from February, 1992 through September, 1992, as Financial Controller at Tack
Hsin Holdings Limited, a listed company in Hong Kong, where he was responsible
for accounting and financial functions. From October, 1992, through December,
1994, Mr. Tam was Finance Director of Hong Wah (Holdings) Limited. He is an
associate of the Hong Kong Society of Accountants and a fellow of the Chartered
Association of Certified Accountants. He is also a certified public accountant
in Hong Kong. He holds a Bachelor's degree in Business Administration from the
Chinese University of Hong Kong.
Mr. Wong Wah On has been a director since December 30, 1997. Mr. Wong
is also the Financial Controller and Secretary of the Company and a member of
the supervisory committee of HARC. He is responsible for assisting the Chief
Finance Officer with 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.
Mr. Wan Ying Lin has been a director of the Company since February 4,
1998. Mr. Wan also has been the Director and Deputy General Manager of OVM
International Holding Corp. (OTC Bulletin Board: OVMI), which is included on the
OTC Bulletin Board operated by the National Association of Securities Dealers,
Inc., since September 1996. Mr. Wan was graduated from the Guangxi Liuzhou
Institute of Medical Specialty specializing in administration and management.
From January 1986 through December 1987, he was the manager of Lam Ko Mould
Company in charge of the China marketing and development division in Hong Kong.
Then in January 1988 through February 1993, he worked as the marketing manager
of Wai Tong Trading Company in Hong Kong. In 1993, he joined the Hong Kong
Prestressing Concrete Engineering Company Limited, where he serves as manager.
Mr. Ng Kin Sing has been a director of the Company since February 1,
1999 and also serves as a member of the Board's Audit Committee. Mr. Ng is the
managing director of Action Plan Limited, a securities investment company. From
November 1995 until March 1998, Mr. Ng was sales and dealing director for
NatWest Markets (Asia) Limited; and from May 1985 until October 1996, he was the
dealing director of BZW Asia Limited, an international securities brokerage
house. Mr. Ng holds a bachelor's degree in Business Administration from the
Chinese University of Hong Kong.
33
<PAGE>
At the annual meeting of shareholders on December 15, 1998, Messrs.
Ching Lung Po and Lin Yu Quan were elected to serve as Class II Directors until
the annual meeting to be held in 2001 and until their successors have been duly
elected and qualified. Information regarding the resignations of former director
and Vice Chairman Zhang Yibing, and the appointments of Ng Kin Sing to fill the
vacant director position, is disclosed in the Company's Current Report on Form
8-K, dated January 29, 1999. Messrs. Tam Cheuk Ho and Wong Wah On serve in Class
I until the annual meeting to be held in 2000 and until their successors have
been duly elected and qualified; and Messrs. Li Shunxing, Wan Ying Lin and Ng
Kin Sing 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, 1998 and the ages of and positions with the Company
held by each of such persons:
Name Age Position
---- --- --------
Li Fei Lie 32 Vice President
Mr. Li Fei Lie is the Vice President of the Company. He is also vice
president and a director of HARC, where he is responsible for accounting and
financial control. On July 17, 1998, he became the President of HARC and be
responsible to oversee the management and operation of HARC. In 1987, he
obtained a Bachelor's degree in Economics from the Beijing University. In 1990,
he obtained a Master's degree in Economics from the same university. From 1990
through April 1991, he was the Vice Chairman of the Beijing Agency of Guangxi
Wuzhou Boiler Factory. From April, 1991 through October, 1992, he was the
General Manager of the Development Department of Shenzhen Hong Wah Industrial
and Commerce Company Ltd., a Sino-foreign limited liability joint stock company.
In October, 1992, Mr. Li became Assistant to the General Manager of Hong Wah
(Holdings) Limited and was responsible for the preparatory work relative to the
incorporation of HARC.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Based upon the Company's review of Forms 5 furnished to the Company
with respect to its fiscal year ended December 31, 1998, each of the following
directors reported their status on Form 5, which was previously reportable on
Form 3: Messrs. Ching Lung Po, Lin Yu Quan and Wan Ying Lin became directors of
the Company on February 4, July 20 and February 4, 1998, respectively. None of
such directors reported holdings of the Company's Common Stock in 1998.
<TABLE>
<CAPTION>
[Item 11] EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
-----------------
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 1998 -0- -0- -0- -0- -0-
1997 -0- -0- -0- -0- -0-
1996 -0- -0- -0- -0- -0-
Li Fei Lie, Vice President, 1998 30,968 -0- 38,709 10,000 -0-
President of HARC
1997 30,968 2,581 38,709 10,000 -0-
1996 30,968 2,581 38,709 10,000 -0-
===================================================================================================================
</TABLE>
34
<PAGE>
(1) As of December 31, 1998, none of the stock options held by 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 stock option plan and adjusted as a
result of the one-for-ten reverse stock split) of the common stock on December
31, 1998, was US$0.66 per share.
The Company paid its President, Li Shunxing, no annual salary or bonus
in 1996, 1997 and 1998. During the fiscal years ended December 31, 1996, 1997
and 1998, 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.
Li Fie Lie, Vice President of the Company and President and a director
of HARC, was paid annual compensation of HK$560,000 (US$72,258) for each of the
two years ended December 31, 1996 and 1997, HK$540,000 (US$69,677) for the year
ended December 31, 1998. 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 was 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 received a base salary of HK$240,000 (US$30,968)
plus allowances of HK$300,000 (US$38,710) annually, which base salary was
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 determined. The Employment Agreement had a term of three (3)
years and was terminated on July 31, 1998. As of August 1, 1998, the Company
entered into an Employment Agreement with Mr. Li. In accordance with the terms
of the Employment Agreement, Mr. Li has been employed by the Company to perform
such duties as the Board of Directors shall from time to time determine. Mr. Li
shall receive a base salary of HK$540,000 (US$69,677) 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 the Company's Board of Directors may determine. The Employment Agreement has
a term of two years and shall be automatically renewed unless earlier terminated
as provided therein. See "Certain Relationships and Related Transactions."
On May 1, 1997, the Company entered into a consulting agreement with
Brender Services Limited, a British Virgin Islands company beneficially owned by
Mr. Wong Wah On, the Director, Secretary and Financial Controller of the
Company, pursuant to which Brender Services Limited agreed to provide consulting
services to the Company for a period of three years commencing on May 1, 1997.
In consideration of the services to be rendered by Brender Services Limited, the
Company agreed to pay a consultancy fee of HK$270,000 (US$34,839) per month. 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, 1998, a consulting fee of HK$3,240,000 (US$418,065),
was paid to Brender Services Limited. See "Certain Relationships and Related
Transactions." The Consulting Agreement was terminated effective February 1,
1999.
On February 1, 1999, the Company entered into an Employment Agreement
with Tam Cheuk Ho. In accordance with the terms of the Employment Agreement, Mr.
Tam has been employed by the Company as the Chief Financial Officer and to
perform such duties as the Board of Directors shall from time to time determine.
Mr. Tam shall receive a base salary of HK$1,800,000 (US$232,258), 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 the Company's Board of Directors may determine. The Employment Agreement has
a term of two years and shall be automatically renewed unless earlier terminated
as provided therein. See "Certain Relationships and Related Transactions."
On February 1, 1999, the Company entered into an Employment Agreement
with Wong Wah On. In accordance with the terms of the Employment Agreement, Mr.
Wong has been employed by the Company as the Financial Controller and Corporate
35
<PAGE>
Secretary and to perform such duties as the Board of Directors shall from time
to time determine. Mr. Wong shall receive a base salary of HK$1,200,000
(US$154,839), 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 the Company's Board of Directors may determine. The
Employment Agreement has a term of two years and shall be automatically renewed
unless earlier terminated as provided therein. See "Certain Relationships and
Related Transactions."
On February 1, 1999, the Company entered into a Service Agreement with
Ching Lung Po. In accordance with the terms of the Service Agreement, Mr. Ching
has been employed by the Company as an Chief Executive Officer and to perform
such duties as the Board of Directors shall from time to time determine. Mr.
Ching shall receive a base salary of HK$2,160,000 (US$278,710), 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 the Company's Board of Directors may determine. The Employment Agreement has
a term of two years and shall be automatically renewed unless earlier terminated
as provided therein. 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, 1998, no holder of stock
options exercised such options, and all stock options granted remained
outstanding. Also during such fiscal year, no long-term incentive plans or
pension plans were in effect with respect to any of the Company's officers,
directors or employees.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company's Board of Directors did not have a compensation committee
or a committee performing similar functions during the year ended December 31,
1998, and no 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 March 31, 1999 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
------------------- ------------------------ -----
<S> <C> <C>
Winsland Capital Limited 334,800 Common Stock 5.65%
TrustNet Chambers 3,200,000 Series B Preferred 100%
P.O. Box 3444, Road Town
Tortola, British Virgin Islands
Worlder International Company 486,000 Common Stock 8.20%
Limited (2)
21/F., Great Eagle Centre
No. 23 Harbour Road
Hong Kong
</TABLE>
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<PAGE>
(1) The inclusion herein of any shares deemed beneficially owned does not
constitute an admission of beneficial ownership of these shares.
(2) 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 shares of Common Stock owned by Silverich Limited,
which is wholly-owned by Worlder.
SHARE OWNERSHIP OF OFFICERS AND DIRECTORS
The following table sets forth certain information with respect to the
beneficial ownership of Common Stock as of March 31, 1999, by (i) each director
of the Company, (ii) each executive officer of the Company named in the summary
compensation table, and (iii) all directors and executive officers of the
Company as a group. All information with respect to beneficial ownership has
been furnished by the respective director or executive officer (in the case of
shares beneficially owned by each of them). Unless otherwise indicated in a
footnote, each stockholder possesses sole voting and investment power with
respect to the shares indicated as beneficially owned.
<TABLE>
<CAPTION>
Amount and
Name of Nature of Percent of
Beneficial Owner Beneficial Ownership (1) Class
---------------- ------------------------ -----
<S> <C>
Li Shunxing -0- N/A
Han Jian Zhun -0- (2) N/A
Tam Cheuk Ho -0- (3) N/A
Li Fei Lie -0- (4) N/A
Wong Wah On 43,200 Common Stock (5) 0.73%
Ching Lung Po 334,800 Common Stock (6) 5.65%
All executive officers 378,000 Common Stock 6.38%
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) 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.
(3) 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.
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<PAGE>
(4) 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.
(5) Brender Services Limited owns 43,200 shares of Common Stock. Brender
Services Limited is beneficially owned by Wong Wah On, the Director, Secretary
and 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.
(6) Winsland Capital Limited owns 334,800 shares of Common Stock. Winsland
Capital Limited is beneficially owned by Ching Lung Po, the Chairman of the
Board of Directors of the Company.
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 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:
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<PAGE>
Yiu Yat Hung (former director) 6,000 shares
Tam Cheuk Ho 6,000 shares
Han Jian Zhun (former director) 6,000 shares
Wong Wah On 6,000 shares
Li Fei Lie 100,000 shares
In addition, the board of directors granted options to the following employees
and consultant to purchase shares of the Company's Common Stock:
Brender Services Limited 100,000 shares
Cheung Yu Shum 500,000 shares
Tse Chi Kai 300,000 shares
Ma Sin Ling 500,000 shares
Cheung Siu Yin 10,000 shares
Woo Pui Yan 10,000 shares
Kwok Kwan Hung 386,000 shares
Fu Yang Guang 200,000 shares
Lin Jia Ping 270,000 shares
All of the stock options were issued in accordance with the terms of the Plan at
an exercise price of US$3.78 (the fair market value of the Common Stock as of
July 1, 1995) and 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 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:
Yiu Yat Hung (former director) 600 shares
Tam Cheuk Ho 600 shares
Han Jian Zhun (former director) 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
39
<PAGE>
[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$629,227).
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$603,865)
but keeping unchanged HARC's percentage ownership of Xilian Mill at 12.64%.
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$20,560) 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 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. The
Operating Subsidiaries are also guaranteed a minimum gross profit margin of 3.5%
for sales of natural rubber purchased 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
40
<PAGE>
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.
As of March 31, 1995, the Company entered into an Exchange Agreement
with several of its shareholders whereby the Company's outstanding indebtedness
to those shareholders, in the amount of approximately US$6,400,000, was
exchanged for 6,400,000 shares of Series A Preferred Stock, which was authorized
and issued by the Company as of that date. The shares of Series A Preferred
Stock were issued pursuant to the Exchange Agreement to the shareholders as
follows: Hong Wah Investment Holdings Limited (2,432,000 shares), China
Everbright Financial Holdings Limited. (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" and the
China Resources Development, Inc., Amended and Rested 1995 Stock Option Plan,
which is attached hereto as Exhibit 10.34 and incorporated herein by reference.
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 rendered
by Brender Services Limited, the Company agreed to pay a consultancy fee of
HK$170,000 (US$21,935) 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$21,935) 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. As of April 30, 1997, the Company renewed the consulting agreement
with Brender Services Limited pursuant to which the Company agreed to pay a
consultancy fee of HK$270,000 (US$32,609) per month effective May 1, 1997 for a
three-year term in consideration of the accounting and consulting services
rendered by Brender Services Limited. During the year ended December 31, 1998, a
consulting fee of HK$3,240,000 (US$418,065) was paid to Brender Services
Limited. The consulting agreement was terminated with effect from February 1,
1999.
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<PAGE>
As of August 1, 1995, Billion Luck entered into an Employment Agreement
with Li Fei Lie. Mr Li is presently the Vice President of the Company and the
president and a director of HARC, but, in accordance with the terms of the
Employment Agreement, Mr. Li had 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 received a base salary of HK$240,000
(US$30,968) annually. The Employment Agreement had a term of three (3) years and
was terminated on July 31, 1998. As of August 1, 1998, the Company entered into
an Employment Agreement with Li Fei Lie. In accordance with the terms of the
Employment Agreement, Mr. Li has been employed by the Company as Vice President
and to perform such duties with respect to the Company as the Company's Board of
Directors shall from time to time determine. Mr. Li shall receive a base salary
of HK$540,000 (US$69,677) annually. The Employment Agreement had a term of one
(1) year and shall be automatically renewed thereafter unless earlier terminated
as provided therein.
During the three fiscal years ended December 31, 1996, 1997 and 1998,
the Operating Subsidiaries engaged in the trading of natural rubber futures
contracts through a broker owned by Jin Huan Corporation ("Jin Huan"), a PRC
company which is owned by the Farming Bureau. These transactions resulted in
payments of handling fees by the Operating Subsidiaries to the broker which
amounted to Rmb3.5 million (US$422,705), Rmb0.3 million (US$36,232) and nil, in
1996, 1997 and 1998, respectively.
On March 25, 1996, HARC entered into a Loan Agreement with the Farming
Bureau by which HARC borrowed Rmb35,867,857 (US$4,331,867) in order to more
effectively utilize capital raised and to enable HARC to more effectively plan
for its production operations and new investment projects. 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$5,513,285) in order to more effectively
utilize capital raised and to enable HARC to more effectively plan for its
production operations and new investment projects. 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
China Everbright Financial Holdings Limited (formerly known as "Everbright
Finance and Investment Co. Ltd."), 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$8,696), 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,
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<PAGE>
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$7.80 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 China Everbright Financial Holdings. Limited (formerly known as
"Everbright Finance and Investment Co. Ltd."), 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.
As of April 30, 1998, the Company entered into an agreement with
Guilinyang Farm pursuant to which Guilinyang Farm agreed to sell and the Company
agreed to buy 5,000,000 shares, representing 5% of the total issued and
outstanding share capital of HARC, for consideration of Rmb7 million
(US$845,411).
On February 1, 1999, the Company entered into an Employment Agreement
with Tam Cheuk Ho. In accordance with the terms of the Employment Agreement, Mr.
Tam has been employed by the Company as the Chief Financial Officer and to
perform such duties as the Board of Directors shall from time to time determine.
Mr. Tam shall receive a base salary of HK$1,800,000 (US$232,258), 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 the Company's Board of Directors may determine. The Employment Agreement has
a term of two years and shall be automatically renewed unless earlier terminated
as provided therein.
On February 1, 1999, the Company entered into an Employment Agreement
with Wong Wah On. In accordance with the terms of the Employment Agreement, Mr.
Wong has been employed by the Company as the Financial Controller and Corporate
Secretary and to perform such duties as the Board of Directors shall from time
to time determine. Mr. Wong shall receive a base salary of HK$1,200,000
(US$154,839), 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 the Company's Board of Directors may determine. The
Employment Agreement has a term of two years and shall be automatically renewed
unless earlier terminated as provided therein.
On February 1, 1999, the Company entered into a Service Agreement with
Ching Lung Po. In accordance with the terms of the Service Agreement, Mr. Ching
has been employed by the Company as an Chief Executive Officer and to perform
such duties as the Board of Directors shall from time to time determine. Mr.
Ching shall receive a base salary of HK$2,160,000 (US$278,710), 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 the Company's Board of Directors may determine. The Employment Agreement has
a term of two years and shall be automatically renewed unless earlier terminated
as provided therein.
In addition to these transactions, the following business relationships
existed during the fiscal year ended December 31, 1998, for which disclosure is
required: As disclosed in "Management and Certain Security Holders,"
hereinabove, Lin Yu Quan, the Vice Chairman of the Board of Directors of the
Company, also serves as the Director of the Farming Bureau. The nature and scope
of the relationship between the Company and the Farming Bureau is set forth in
"Business" and elsewhere hereinabove.
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<PAGE>
[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:
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, 1996, 1997 and 1998
b. Consolidated statements of changes in
shareholders' equity for the three years ended
December 31, 1996, 1997 and 1998
c. Consolidated balance sheets as of December 31,
1997 and 1998
d. Consolidated statements of cash flows for the
three years ended December 31, 1996, 1997 and 1998
e. Notes to consolidated financial statements.
The following Exhibits are filed as part of this Form 10-K:
Exhibit No. Exhibit Description
----------- -------------------
3.1 Articles of Incorporation of the Registrant, filed on January
15, 1986 (Filed with Annual Report on Form 10-K/A for the
fiscal year ended December 31, 1994, and incorporated herein
by reference.)
3.2 By-laws of the Registrant (Filed with Annual Report on Form
10-K/A for the fiscal year ended December 31, 1994, and
incorporated herein by reference.)
3.3 Certificate of Amendment of Articles of Incorporation of the
Registrant, filed on November 18, 1994 (Filed with Annual
Report on Form 10-K/A for the fiscal year ended December 31,
1994, and incorporated herein by reference.)
3.4 Certificate of Amendment of Articles of Incorporation of the
Registrant, filed on November 18, 1994 (Filed with Annual
Report on Form 10-K/A for the fiscal year ended December 31,
1994, and incorporated herein by reference.)
3.5 Certificate of Amendment of Articles of Incorporation of the
Registrant, effective March 31, 1995, and filed on June 19,
1995 (Filed with Quarterly Report on Form 10-Q/A for the
fiscal quarter ended March 31, 1995, and with Current Report
on Form 8-K dated June 19, 1995, and incorporated herein by
reference.)
3.6 Certificate of Amendment of Articles of Incorporation of the
Registrant, effective December 30, 1996 (Filed with Annual
Report on Form 10-K/A for the fiscal year ended December 31,
1996, and incorporated herein by reference.)
44
<PAGE>
3.7 Amended and Restated By-laws of the Registrant, as amended on
December 30, 1996 (Filed with Annual Report on Form 10-K/A for
the fiscal year ended December 31, 1996, and incorporated
herein by reference.)
4.1 Certificate of Designation of Series B Convertible Preferred
Stock, filed on December 13, 1995 (Filed with Current Report
on Form 8-K dated March 8, 1996, and incorporated herein by
reference.)
4.2 Certificate of Amendment of Certificate of Designation of
Series B Convertible Preferred Stock, effective December 31,
1997 (Filed with Annual Report on Form 10-K/A for the fiscal
year ended December 31, 1996, and incorporated herein by
reference.)
10.1 Assignment Agreement dated January 21, 1994, by and between
Hong Wah (Holdings) Limited and Billion Luck Company Ltd.
(Filed with Annual Report on Form 10-K/A for the fiscal year
ended December 31, 1994, and incorporated herein by
reference.)
10.2 Contract on Investment for the Setting up of Hainan
Agricultural Resources Company Ltd. dated January 31, 1994, by
and among Hainan Province Agricultural Reclamation General
Company (the Farming Bureau), Hainan Province Guilinyang State
Farm, and Billion Luck Company Ltd. (Original Chinese version
with English translation filed with Annual Report on Form
10-K/A for the fiscal year ended December 31, 1994, and
incorporated herein by reference.)
10.3 Loan Agreement dated May 10, 1994, by and among Everbright
Finance & Investment Co. Limited, Worlder International
Company Limited, Hong Wah Investment Holdings Limited,
Silverich Limited, Brender Services Limited, and Billion Luck
Company Ltd. (Filed with Annual Report on Form 10-K/A for the
fiscal year ended December 31, 1994, and incorporated herein
by reference.)
10.4 Credit Agreement dated June 1, 1994, by and among Everbright
Finance & Investment Co. Limited, Worlder International
Company Limited, Hong Wah Investment Holdings Limited and
Billion Luck Company Ltd. (Filed with Annual Report on Form
10-K/A for the fiscal year ended December 31, 1994, and
incorporated herein by reference.)
10.5 Contract on the Transfer of Share Ownership of Hainan Zhongya
Aluminum Co., Ltd. dated July 11, 1994, by and between Hainan
Province Guilinyang State Farm and Hainan Agricultural
Resources Co., Ltd. (Filed with Annual Report on Form 10-K/A
for the fiscal year ended December 31, 1994, and incorporated
herein by reference.)
10.6 Letter Agreement dated August 8, 1994, by and among Everbright
Finance & Investment Co. Limited, Worlder International
Company Limited, Hong Wah Investment Holdings Limited and
Billion Luck Company Ltd., supplementing Credit Agreement
dated June 1, 1994 (Filed 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
45
<PAGE>
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.)
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.)
46
<PAGE>
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.)
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 with Annual Report on Form 10-K/A for the fiscal
year ended December 31, 1996,and incorporated herein by
reference.)
10.29 Loan Agreement between HARC and the Registrant, dated March
25, 1996 (Certified English translation of original Chinese
version filed with Annual Report on Form 10-K/A for the fiscal
year ended December 31, 1996, and incorporated herein by
reference.)
47
<PAGE>
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 with Annual
Report on Form 10-K/A for the fiscal year ended December 31,
1996, and incorporated herein by reference.)
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 with Annual Report on Form 10-K/A for
the fiscal year ended December 31, 1996, and incorporated
herein by reference.)
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 with Annual Report on Form 10-K/A for the fiscal
year ended December 31, 1996, and incorporated herein by
reference.)
10.33 Exchange Agreement, by and between the Registrant and
Everbright Finance & Investment Co. Limited, dated December
31, 1996 (Filed with Annual Report on Form 10-K/A for the
fiscal year ended December 31, 1996, and incorporated herein
by reference.)
10.34 China Resources Development, Inc., Amended and Restated 1995
Stock Option Plan, as amended on December 30, 1996 (Filed with
Annual Report on Form 10-K/A for the fiscal year ended
December 31, 1996, and incorporated herein by reference.)
10.35 Agency Agreement on Natural Rubber Distribution between Hainan
General Bureau Jin Huan Materials Supply General Company and
HARC, dated January 2, 1997 (Certified English translation of
original Chinese version filed with Quarterly Report on Form
10-Q for the fiscal quarter ended March 31, 1997, and
incorporated herein by reference.)
10.36 Advertising and Media Agreement by and between the Registrant
and Marketing Direct Concepts, Inc., dated April 1, 1997
(Filed with Quarterly Report on Form 10-Q for the fiscal
quarter ended June 30, 1997, and incorporated herein by
reference.)
10.37 Financial Consulting Agreement by and between the Registrant
and Integrated Capital Development Group, Inc., dated May 1,
1997 (Filed with Quarterly Report on Form 10-Q for the fiscal
quarter ended June 30, 1997, and incorporated herein by
reference.)
10.38 Consulting Agreement between the Registrant and Brender
Services Limited, dated April 30, 1997 (Filed with Annual
Report on Form 10-K for the fiscal year ended December 31,
1997, and incorporated herein by reference.)
10.39 Stock Purchase Agreement, by and between HARC and Guilinyang
Farm, dated December 29, 1997. (Certified English translation
of original Chinese version filed with Annual Report on Form
10-K for the fiscal year ended December 31, 1997, and
incorporated herein by reference.)
10.40 Agreement for the Sale and Purchase of Share in Hainan Zhongya
Aluminum Company Ltd., dated December 29, 1997, by and between
First Supply and Guilinyang Farm. (Certified English
translation of original Chinese version filed with Annual
Report on Form 10-K for the fiscal year ended December 31,
1997, and incorporated herein by reference.)
10.41 Agreement for the Sale and Purchase of Share in Hainan
Zhongwei Agricultural Resources Company Ltd., dated April 30,
1998, by and between Guilinyang Farm and the Company
(Certified English translation of original Chinese version
filed with Quarterly Report on Form 10-Q for the fiscal
quarter ended June 30, 1998, and incorporated herein by
reference.)
48
<PAGE>
10.42 Employment Agreement between the Company and Li Feilie, dated
August 1, 1998 (Filed herewith.)
10.43 Employment Agreement between the Company and Tam Cheuk Ho,
dated February 1, 1999 (Filed herewith.)
10.44 Employment Agreement between the Company and Wong Wah On,
dated February 1, 1999 (Filed herewith.)
10.45 Service Agreement between the Company and Ching Lung Po, dated
February 1, 1999 (Filed herewith.)
11.3 Computation of Earnings Per Share for Fiscal Year ended
December 31, 1998 (Contained in Financial Statements filed
herewith.)
21 Subsidiaries of the Registrant (Filed herewith.)
27.4 Financial Data Schedule (Filed herewith. For SEC use only.)
99.2 Notice of Annual Meeting, Proxy Statement and Proxy
distributed to shareholders in advance of annual meeting held
on December 15, 1998 (Filed with Schedule 14A dated November
30, 1998, and incorporated herein by reference.)
During the last quarter of the fiscal year ended December 31, 1998, the
Company filed no reports on Form 8-K. However, on March 12, 1999, the
Company filed a report on Form 8-K dated January 29, 1999, which
reported, in Item 5, the proposed one-for-ten reverse stock split of
the Company's outstanding common tock, $0.001 per share, and certain
changes to the Company's shareholders and board of directors. No
financial statements were filed.
49
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CHINA RESOURCES DEVELOPMENT, INC.
By:/s/ Li Shunxing
-------------------------------
Li Shunxing, President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Ching Lung Po Chairman of the Board of April 15, 1999
- --------------------------- Directors, Chief Executive
Ching Lung Po Officer
/s/ Lin Yu Quan Vice Chairman of the April 15, 1999
- --------------------------- Board of Directors
Lin Yu Quan
/s/ Li Shunxing President/Director April 15, 1999
- ---------------------------
Li Shunxing
/s/ Tam Cheuk Ho Chief Financial Officer/ April 15, 1999
- --------------------------- Director
Tam Cheuk Ho
/s/ Wong Wah On Financial Controller/ April 15, 1999
- --------------------------- Director/Secretary
Wong Wah On
/s/ Wan Ying Lin Director April 15, 1999
- ---------------------------
Wan Ying Lin
/s/ Ng Kin Sing Director April 15, 1999
- ---------------------------
Ng Kin Sing
</TABLE>
50
<PAGE>
APPENDIX A
Financial Statements
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, 1996, 1997 and 1998
b. Consolidated statements of changes in shareholders' equity for
the three years ended December 31, 1996, 1997 and 1998
c. Consolidated balance sheets as of December 31, 1997 and 1998
d. Consolidated statements of cash flows for the three years
ended December 31, 1996, 1997 and 1998
e. Notes to consolidated financial statements.
51
<PAGE>
Consolidated Financial Statements
CHINA RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES
December 31, 1998
<PAGE>
CHINA RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Pages
Report of independent auditors F-1
Consolidated statements of income F-2
Consolidated statements of shareholders' equity F-3
Consolidated balance sheets F4 - F5
Consolidated statements of cash flows F-6
Notes to consolidated financial statements F-7 - F-42
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
China Resources Development, Inc.
We have audited the accompanying consolidated balance sheets of China Resources
Development, Inc. and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of income, shareholders' equity, and cash flows
for each of the three years in the period ended December 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of China Resources
Development, Inc. and subsidiaries at December 31, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity with accounting
principles generally accepted in the United States of America.
F-1
Hong Kong
February 23, 1999
<PAGE>
<TABLE>
<CAPTION>
CHINA RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except share and per share data)
Year ended December 31,
Notes 1996 1997 1998 1998
----- ---- ---- ---- ----
RMB RMB RMB US$
<S> <C> <C> <C> <C>
NET SALES* 1,827,499 1,149,171 527,692 63,731
COST OF SALES* ( 1,677,056) ( 1,092,972) ( 510,631) ( 61,670)
--------------- --------------- --------------- ---------------
GROSS PROFIT 150,443 56,199 17,061 2,061
DEPRECIATION ( 1,813) ( 1,429) ( 1,343) ( 162)
PROVISION FOR DOUBTFUL
ACCOUNTS - - ( 4,740) ( 572)
LOSS ON IMPAIRMENT OF AN
INVESTMENT* 9 - - ( 49,969) ( 6,035)
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES* ( 50,488) ( 32,934) ( 35,419) ( 4,278)
FINANCIAL INCOME/
(EXPENSES), NET* 4 ( 19,870) 145 6,590 796
OTHER INCOME, NET* 5 6,054 30,580 4,070 491
--------------- --------------- --------------- ---------------
INCOME/(LOSS) BEFORE INCOME TAXES 84,326 52,561 ( 63,750) ( 7,699)
INCOME TAXES 6 ( 13,991) ( 9,798) - -
--------------- --------------- --------------- ---------------
INCOME/(LOSS) BEFORE MINORITY
INTERESTS 70,335 42,763 ( 63,750) ( 7,699)
MINORITY INTERESTS ( 34,513) ( 24,563) 11,079 1,338
--------------- --------------- --------------- ---------------
NET INCOME/(LOSS) 35,822 18,200 ( 52,671) ( 6,361)
=============== =============== =============== ===============
EARNINGS/(LOSS) PER SHARE: 7
BASIC 10.14 3.05 ( 8.79) ( 1.06)
=============== =============== =============== ===============
Diluted 10.02 3.04 ( 8.79) ( 1.06)
=============== =============== =============== ===============
- ------------------
* Including the following amounts resulting from transactions with related
parties (note 13):
Year ended December 31,
1996 1997 1998 1998
-------------------------------------------------------------
RMB RMB RMB US$
Net sales 205,694 278,051 30,373 3,668
Cost of sales ( 1,412,835) ( 993,557) ( 374,039) ( 45,174)
LOSS ON IMPAIRMENT OF AN
INVESTMENT - - ( 28,718) ( 3,468)
Selling, general and
administrative expenses ( 2,381) ( 6,981) ( 4,411) ( 533)
Financial income/(expenses), net 25,031 10,509 ( 235) ( 28)
Other income/(EXPENSES), net ( 926) 1,485 - -
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
<PAGE>
<TABLE>
<CAPTION>
CHINA RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Amounts in thousands, except share and per share data)
Accumulated
Series A Series B Additional other
Common preferred preferred paid-in Retained comprehensive
Notes stock stock stock capital Reserves earnings income/(loss) Total
-----------------------------------------------------------------------------------------
RMB RMB RMB RMB RMB RMB RMB RMB
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 101 53,930 - 20,961 8,930 20,527 - 104,449
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") 11 270 ( 53,930) 53,660 -
Issuance of 1,283 shares of
series B convertible
preferred stock, net of
share offering costs 11 72,520 72,520
Conversion of 1,653 shares of
series B convertible preferred
stock to 4,579,004 shares
of common stock 11 383 ( 383)
Reverse stock split, ten-to-one 11 ( 679) 679 - -
Exchange of 3,200,000 shares
of Restricted Common Stock
for 3,200,000 shares of
series B preferred stock 11 ( 27) 27 -
Net income and comprehensive
income 35,822 - 35,822
Transfer to reserves 17 8,818 ( 8,818) -
------- -------- ------- -------- -------- --------- -------- --------
Balance at December 31, 1996 48 - 27 147,437 17,748 47,531 - 212,791
Issuance of 250,000 shares
of common stock 11 2 6,298 6,300
Issuance of 350,000 common
stock warrants to non-
employees 12 3,681 3,681
Net income and comprehensive
income 18,200 - 18,200
Transfer to reserves 17 7,766 ( 7,766) -
------- -------- ------- -------- -------- --------- -------- --------
Balance at December 31, 1997 50 - 27 157,416 25,514 57,965 - 240,972
Repurchase and retirement of
100,000 shares of common
stock 11 ( 1) ( 852) ( 853)
Net loss ( 52,671) ( 52,671)
Currency translation
adjustments 18 ( 4) ( 4)
------
Comprehensive loss ( 52,675)
------
Transfer to reserves 17 760 ( 760) -
------- -------- ------- -------- -------- --------- -------- --------
Balance at December 31, 1998 49 - 27 156,564 26,274 4,534 ( 4) 187,444
======= ======== ======= ======== ======== ========= ======= ========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-3
<PAGE>
CHINA RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except share and per share data)
<TABLE>
<CAPTION>
December 31,
Notes 1997 1998 1998
--------------------------------------
RMB RMB US$
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents 124,547 129,238 15,608
Trade receivables, less allowance of
RMB529 in 1998 and Nil in 1997 11,249 8,463 1,022
Inventories - finished goods 61,792 10,569 1,277
Other receivables, deposits and prepayments,
less allowance of RMB4,211 in 1998 and
Nil in 1997 29,139 30,449 3,677
Amount due from Farming Bureau 13 14,921 33,667 4,066
Amounts due from related companies 13 40,044 30,802 3,720
------- ------- -------
TOTAL CURRENT ASSETS 281,692 243,188 29,370
PROPERTY AND EQUIPMENT 8 7,496 7,243 875
INVESTMENTS 9 147,671 119,301 14,408
GOODWILL 1,021 994 120
------- ------- -------
TOTAL ASSETS 437,880 370,726 44,773
======= ======= =======
</TABLE>
F-4
<PAGE>
<TABLE>
<CAPTION>
CHINA RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
(Amounts in thousands, except share and per share data)
December 31,
Notes 1997 1998 1998
------------------------------------------
RMB RMB US$
<S> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable 20,284 12,204 1,474
Other payables and accrued liabilities 10 21,106 15,476 1,869
Income taxes payable 22,375 16,366 1,976
Amounts due to related companies 13 - 31,291 3,779
------- ------- -------
TOTAL CURRENT LIABILITIES 63,765 75,337 9,098
MINORITY INTERESTS 133,143 107,945 13,037
------- ------- -------
TOTAL LIABILITIES AND
MINORITY INTERESTS 196,908 183,282 22,135
------- ------- -------
COMMITMENTS AND CONTINGENCIES 19
SHAREHOLDERS' EQUITY Common stock, US$0.001 par value:
Authorized - 200,000,000 shares in 1998 and 1997
Issued and outstanding - 5,929,004 shares
in 1998 and 6,029,004 shares in 1997 11 50 49 6
Preferred stock, authorized -
10,000,000 shares in 1998 and 1997:
Series B preferred stock, US$0.001 par value:
Authorized - 3,200,000 shares in 1998 and 1997
Issued and outstanding - 3,200,000
shares in 1998 and 1997 11 27 27 3
Additional paid-in capital 157,416 156,564 18,909
Reserves 17 25,514 26,274 3,173
Retained earnings 17 57,965 4,534 548
Accumulated other comprehensive income/(loss) 18 - ( 4) ( 1)
------- ------- -------
TOTAL SHAREHOLDERS' EQUITY 240,972 187,444 22,638
------- ------- -------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY 437,880 370,726 44,773
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
CHINA RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands, except share and per share data)
Year ended December 31,
1996 1997 1998 1998
---- ---- ---- ----
RMB RMB RMB US$
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income/(loss) 35,822 18,200 ( 52,671) ( 6,361)
Adjustments to reconcile net income/(loss) to net cash
provided by/(used in) operating activities:
Depreciation and amortization 1,840 1,457 1,370 165
Provision for doubtful accounts - - 4,740 572
Provision for inventory write-downs - - 1,554 188
Loss on impairment of an investment - - 49,969 6,035
Stock-based compensation issued to non-employees - 3,680 4,990 603
Minority interests 34,513 24,563 ( 11,079) ( 1,338)
Loss on disposal of property and equipment, net - 463 - -
Changes in operating assets and liabilities:
Trade receivables ( 64,774) ( 7,037) 2,257 273
Inventories 20,338 ( 6,340) 49,669 5,999
Other receivables, deposits and prepayments ( 38,549) 25,917 ( 7,614) ( 920)
Amount due from Farming Bureau ( 26,061) ( 8,911) ( 18,750) ( 2,265)
Amounts due from related companies ( 65,718) ( 27,823) ( 655) ( 79)
Other current assets 5,054 - - -
Accounts payable 47,661 ( 5,564) ( 8,080) ( 976)
Other payables and accrued liabilities 59,697 ( 22,189) ( 5,630) ( 680)
Income taxes payable 6,798 5,312 ( 6,009) ( 726)
Amounts due to related companies 113,280 ( 4,976) 31,291 3,779
------- ------- ------- -------
Net cash provided by/(used in) operating activities 129,901 ( 3,248) 35,352 4,269
------- ------- ------- -------
INVESTING ACTIVITIES
Purchases of property and equipment ( 2,663) ( 2,884) ( 1,090) ( 132)
Purchases of investments ( 2,342) ( 327) - -
Deposit for the purchase of an investment - - (28,718) ( 3,468)
Proceeds from disposal of property and equipment 16 - - -
Loans to related companies ( 67,046) - - -
------- ------- ------- -------
Net cash used in investing activities ( 72,035) ( 3,211) ( 29,808) ( 3,600)
------- ------- ------- -------
FINANCING ACTIVITIES
Issue of share capital less share offering costs 86,914 - - -
Repayment of loans from shareholders ( 15,727) - - -
Repayment of bank borrowings ( 440) - - -
Loan from Farming Bureau 35,868 - - -
Repayment of short term advances ( 86,917) - - -
Repayment of loans from related companies ( 3,500) - - -
Purchases of common stock for retirement - - ( 853) ( 103)
------- ------- ------- -------
Net cash provided by/(used in) financing activities 16,198 - ( 853) ( 103)
------- ------- ------- -------
NET INCREASE/(DECREASE) IN CASH AND CASH
EQUIVALENTS 74,064 ( 6,459) 4,691 566
Cash and cash equivalents, at beginning of year 56,942 131,006 124,547 15,042
------- ------- ------- -------
Cash and cash equivalents, at end of year 131,006 124,547 129,238 15,608
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
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") and its subsidiaries
(collectively the "Group") are principally engaged in the distribution
of natural rubber, the procurement of materials and supplies, and the
distribution of other agricultural products in the People's Republic of
China (the "PRC"). Information on the Group's operations by segment are
included in note 23 to the consolidated financial statements.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Principles of consolidation
---------------------------
The consolidated financial statements are prepared in
accordance with accounting principles generally accepted in
the United States of America ("US GAAP") and include the
accounts of the Company and its subsidiaries. Significant
intercompany accounts and transactions have been eliminated on
consolidation.
(b) Use of estimates
----------------
The preparation of the 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.
(c) Cash and cash equivalents
-------------------------
The Group considers all highly liquid investments and cash
deposits with financial institutions with original maturities
of three months or less to be cash equivalents.
At December 31, 1998 and 1997, cash and cash equivalents
included foreign currency deposits equivalent to RMB5,387
(US$67 and HK$4,522) and RMB3,442 (US$384 and HK$246),
respectively.
(d) Inventories
-----------
Inventories are stated at the lower of cost or market, net of
any hedging adjustments for realized and unrealized gains or
losses on qualifying hedging contracts. Cost is determined
using the first-in, first-out method.
F-7
<PAGE>
CHINA RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
(e) Property and equipment
----------------------
Property and equipment are stated at cost less accumulated
depreciation.
Depreciation is calculated on the straight-line basis to
write-off the cost less estimated residual value of each asset
over its estimated useful life. Estimated useful lives used
for this purpose are as follows:
<TABLE>
<CAPTION>
<S> <C>
Buildings 25 years
Leasehold improvements Over the terms of the leases
Machinery, equipment and motor vehicles 10 - 12.5 years
</TABLE>
(f) Investments
-----------
Investments in companies that are 20% to 50% owned, and over
which the Group is in a position to exercise significant
influence but does not control the financial and operating
decisions, are accounted for by the equity method.
All other equity investments, not being a subsidiary and which
do not have a readily determinable fair value, are accounted
for by the cost method, unless there have been an
other-than-temporary impairment in value, in which event they
are written-down to their net realizable value.
(g) Goodwill
--------
Goodwill is amortized on the straight-line basis over 40
years. Goodwill is periodically reviewed for impairment based
on an assessment of future operations. Accumulated
amortization was RMB110 and RMB83 on December 31, 1998 and
1997, respectively.
(h) Stock-based compensation
------------------------
The Group has elected to follow Accounting Principles Board
Opinion No. 25 "Accounting for Stock Issued to Employees"
("APB 25") and related interpretations in accounting for its
employee stock options, because the Group believes the
alternative fair value accounting provided for under Financial
Accounting Standards Based ("FASB") Statement of Financial
Accounting Standards No. 123 "Accounting for Stock-Based
Compensation" ("SFAS 123") requires the 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 Group's employee stock options equals the market
price of the underlying stock on the date of grant, no
compensation expense is recognized. For disclosure purposes,
pro forma information in accordance with SFAS 123 has been
included in note 12.
F-8
<PAGE>
CHINA RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
(h) Stock-based compensation (continued)
-----------------------------------
In accordance with SFAS 123, except for transactions with
employees that are within the scope of APB 25, all
transactions in which services are received and the
consideration given in the issuance of equity instruments are
accounted for based on the fair value of the consideration
received or the fair value of the equity instruments issued.
The cost of such services is charged to earnings over the
respective service period.
(i) Commodity futures contracts
---------------------------
As part of its risk management strategy, the Group enters into
commodity futures contracts to hedge against the exposure to
price risk associated with existing inventories and certain
firm commitments for the purchase of goods. Such contracts are
designated as hedges, are short term in nature to correspond
to the exposure/commitment periods, and are effective in
hedging the Group's exposure to price changes. Futures
contracts are marked to market and gains or losses on
qualifying hedges are deferred and 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, and are
recognized in earnings when realized as an adjustment to cost
of sales. In 1998, 1997 and 1996, hedging gains of Nil, Nil
and RMB6,715 were deferred and recognized as an adjustment of
the carrying amount of inventories, respectively. Unrealized
changes in fair values of contracts no longer effective as
hedges are recognized in income from the date the contract
becomes ineffective until their expiration.
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 on a mark to market basis are recognized as
income in the period of the change.
(j) Revenue recognition
-------------------
Revenue from product sales is recognized upon the delivery of
goods.
(k) Income taxes
------------
Income taxes have been provided using the liability method in
accordance with FASB Statement of Financial Accounting
Standards No. 109 "Accounting for Income Taxes".
(l) Reverse stock split
-------------------
On December 30, 1996, the Company's shareholders approved a
ten-to-one reverse split of the Company's common stock (the
"Reverse Stock Split"). 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, stock option and per share amounts of the common
stock of the Company have been adjusted retroactively for the
Reverse Stock Split.
F-9
<PAGE>
CHINA RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
(m) Earnings/(loss) per share
-------------------------
Basic and diluted earnings/(loss) per share is calculated in
accordance with FASB Statement of Financial Accounting
Standards No. 128 "Earnings per Share" ("SFAS 128"). All
earnings per share amounts for all periods have been
presented, and where appropriate, restated to conform to the
requirements of SFAS 128.
(n) Foreign currency translation
----------------------------
Transactions and monetary assets and liabilities denominated
in currencies other than Renminbi ("RMB") are translated into
RMB at the respective applicable rates of exchange quoted by
the People's Bank of China (the "Exchange Rate"). Monetary
assets and liabilities denominated in other currencies are
translated into RMB at the applicable 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 functional currency of substantially all the operations of
the Group is RMB, the national currency of the PRC. The
financial statements of operations with functional currency
other than RMB have been translated into RMB in accordance
with FASB Statement of Financial Accounting Standards No. 52
"Foreign Currency Translation". All balance sheet accounts
have been translated using the exchange rates in effect at the
balance sheet date. Income statement amounts have been
translated using the average exchange rate for the year. The
gains and losses resulting from the changes in exchange rates
from year to year have been reported in other comprehensive
income/loss. The effect on comprehensive income of translation
adjustments was insignificant for all years prior to 1998.
The translation of amounts from RMB into US$ for the
convenience of the reader has been made at the rate of
exchange quoted by the People's Bank of China on December 31,
1998 of US$1.00 = RMB8.28, and accordingly, differs from the
underlying foreign currency amounts. No representation is made
that the RMB amounts could have been, or could be, converted
into US$ at that rate on December 31, 1998 or at any other
date.
F-10
<PAGE>
CHINA RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
(o) Comprehensive income
--------------------
The Group adopted Statement of Financial Accounting Standards
No. 130 "Reporting Comprehensive Income" ("SFAS 130") in 1998,
which established standards for reporting and display of
comprehensive income/loss and its components. SFAS 130
requires foreign currency translation adjustments to be
included in other comprehensive income/loss. Comprehensive
income/loss is reported in the consolidated statements of
shareholders' equity. The adoption of SFAS 130 did not have a
material effect on the Group's financial position or results
of operations.
(p) Segment and related information
-------------------------------
In 1998, the Group adopted Statement of Financial Accounting
Standards No. 131 "Disclosures about Segments of an Enterprise
and Related Information"("SFAS 131"), which established
standards for the way that information about operating
segments is reported. SFAS 131 also established standards for
related disclosures about products and services, geographic
areas and major customers. The information for 1997 and 1996
has been revised to conform to SFAS 131.
(q) Retirement benefits
-------------------
The contributions to the retirement plans of employees under
defined contribution retirement plans are charged to earnings
as services are provided.
(r) Impact of recently issued accounting standards and other
--------------------------------------------------------
pronouncements
--------------
In June 1998, the FASB issued Statement of Financial
Accounting Standards No. 133 "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"), which is
required to be adopted in years beginning after June 15, 1999.
The Group expects to adopt the new statement effective January
1, 2000. The statement will require the Group to recognize all
derivatives on the balance sheet at fair value. The Group has
not yet determined what the effect of SFAS 133 will be on the
earnings and financial position of the Group.
In March 1998, the American Institute of Certified Public
Accountants issued Statement of Position 98-1 "Accounting for
the Costs of Computer Software Developed or Obtained for
Internal Use" ("SOP 98-1"), which is effective for fiscal
years beginning after December 15, 1998. The Group plans to
adopt SOP 98-1 on January 1, 1999. SOP 98-1 will require the
capitalization of certain costs incurred after the date of
adoption in connection with developing or obtained software
for internal use. The Group currently expenses such costs as
incurred. The Group does not anticipate that the adoption of
SOP 98-1 will have a significant effect on its results of
operations or financial position.
(s) Comparative amounts
-------------------
Certain comparative amounts have been reclassified to conform
with the current year's presentation.
F-11
<PAGE>
CHINA RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
3. ACQUISITION OF MINORITY INTEREST IN A SUBSIDIARY
On April 30, 1998, the Group acquired an additional 5% equity interest
in a PRC subsidiary, Hainan Zhongwei Agricultural Resources Company
Limited ("Hainan Agricultural"), from Guilinyang State Farm (the
"Guilinyang") for a consideration of RMB7,000. Guilinyang is controlled
by the Hainan Farming Bureau (the "Farming Bureau"), a division of the
Ministry of Agriculture of the PRC and a minority shareholder of Hainan
Agricultural. The purchase consideration of Hainan Agricultural was
used to offset the amount due from Guilinyang. After the acquisition,
the Group's equity interest in Hainan Agricultural increased from 56%
to 61%. The transaction was accounted for as a purchase and the excess
of fair value of the net assets acquired over cost ("negative
goodwill"), amounting to RMB7,119, was allocated to reduce
proportionately the values of long term non-monetary non-current assets
(note 9). The impact of the increase in equity interest on the results
of operations has been accounted for since the date of acquisition.
The pro forma unaudited results of operations for the years ended
December 31, 1998 and 1997, assuming the acquisition had been
consummated as of January 1, 1997, are as follows:
<TABLE>
<CAPTION>
Year ended December 31,
1997 1998
-------------------------
RMB RMB
<S> <C> <C>
Net sales 1,149,171 527,692
Net income/(loss) 20,992 ( 53,551)
Earnings/(loss) per share:
Basic 3.52 ( 8.94)
Diluted 3.51 ( 8.94)
</TABLE>
F-12
<PAGE>
CHINA RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
<TABLE>
<CAPTION>
4. FINANCIAL INCOME/(EXPENSES), NET
Financial income/(expenses), net represent:
Year ended December 31,
1996 1997 1998
---------------------------------------------------
RMB RMB RMB
<S> <C> <C> <C>
Interest income 29,602 14,849 6,862
Interest expense (48,495) (15,007) ( 289)
Foreign exchange gains/(losses), net ( 977) 303 17
------ ------ ------
(19,870) 145 6,590
====== ====== ======
</TABLE>
In connection with the restructuring of operations as set out in note
13(e), with effect from October 1, 1996, the amounts due from certain
related companies have become interest-free and the interest expense on
bank loans of the Group was borne by the Farming Bureau until the
effective transfer of the bank loans to the Farming Bureau in March
1997 (note 13(e)).
5. OTHER INCOME, NET
<TABLE>
<CAPTION>
Other income, net represents:
Year ended December 31,
Notes 1996 1997 1998
------------------------------------------
RMB RMB RMB
<S> <C> <C> <C> <C>
Income from cost method investments 1,525 - -
Rental income 3,474 1,024 900
Net gains on trading of commodity
futures contracts 2(i) 1,374 28,375 1,889
Service fee paid to the Farming Bureau 13(c) ( 5,000) - -
Management fee income 13(d) 6,000 - -
Sales commission received from
a related company 13 - 1,833 -
Loss on disposal of
property and equipment, net - ( 463) -
Others ( 1,319) ( 189) 1,281
-------- --------- --------
6,054 30,580 4,070
======== ========= ========
</TABLE>
F-13
<PAGE>
CHINA RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
6. INCOME TAXES
The components of income/(loss) before income taxes are as follows:
<TABLE>
<CAPTION>
Year ended December 31,
1996 1997 1998
---------------------------------------------------
RMB RMB RMB
<S> <C> <C> <C>
PRC 91,583 65,624 (19,410)
Other countries ( 7,257) (13,063) (44,340)
------ ------ ------
84,326 52,561 (63,750)
====== ====== ======
The provision for income tax consists of the following:
Year ended December 31,
1996 1997 1998
---------------------------------------------------
RMB RMB RMB
Current:
PRC federal income tax 13,991 9,798 -
====== ====== ======
</TABLE>
It is management's intention to reinvest all the income attributable to
the Company earned by its operations outside the United States of
America (the "U.S."). Accordingly, no U.S. federal and state income
taxes have been provided in these consolidated financial statements.
The reconciliation of provision/(benefit) for income tax computed at
the PRC federal statutory tax rate applicable to foreign investment
enterprises operating in Hainan, a Special Economic Zone in the PRC, to
income tax expense is as follows:
<TABLE>
<CAPTION>
Year ended December 31,
1996 1997 1998
---------------------------------------------------
RMB RMB RMB
<S> <C> <C> <C>
PRC federal statutory tax rate 15% 15% 15%
Computed expected tax/(benefit) 12,649 7,884 (9,563)
Higher effective income tax benefit
of another country ( 791) ( 1,840) (1,857)
Net increase in valuation allowance 1,415 3,293 5,068
Non-deductible expenses 536 521 6,352
Others, net 182 ( 60) -
------ ------ ------
Income tax expense for the year 13,991 9,798 -
====== ====== ======
</TABLE>
F-14
<PAGE>
CHINA RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
6. INCOME TAXES (continued)
The deferred tax asset of the Group is comprised of the following:
<TABLE>
<CAPTION>
December 31,
1997 1998
-------------------------
RMB RMB
<S> <C> <C>
Deferred tax asset:
Net operating loss carryforwards 4,824 9,892
Less: Valuation allowance for deferred tax asset ( 4,824) (9,892)
------ ------
- -
====== ======
</TABLE>
Undistributed earnings of the Company's foreign subsidiaries amounted
to approximately RMB 63 million at December 31, 1998. Because those
earnings are considered to be permanently invested, no provision for
U.S. federal and state 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 U.S. income taxes.
Determination of the amount of unrecognized deferred U.S. income tax
liability is not practicable because of the complexities associated
with its hypothetical calculation.
At December 31, 1998, the Company had net operating loss carryforwards
("NOLs") of approximately RMB 8 million for U.S. income tax purposes
that expire in various years through 2017. At December 31, 1998, the
Group's subsidaries in the PRC had NOLs amounting to approximately
RMB 2 for PRC income tax purposes that expire in 2003.
F-15
<PAGE>
CHINA RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
7. EARNINGS/(LOSS) PER SHARE
The following table sets forth the computation of basic and diluted
earnings/(loss) per share:
<TABLE>
<CAPTION>
Year ended December 31,
1996 1997 1998
---------------------------------------------------
RMB RMB RMB
<S> <C> <C> <C>
Numerator
Numerator for basic and diluted earnings/(loss) per share:
Income/(loss) attributable to common
shareholders 35,822 18,200 ( 52,671)
========= ========= =========
Denominator
Denominator for basic earnings/(loss) per share:
Weighted-average number of shares 3,533,512 5,958,171 5,991,504
Effect of dilutive securities:
Stock options 42,446 - -
Warrants - 17,451 -
--------- --------- ---------
Dilutive potential common shares 42,446 17,451 -
--------- --------- ---------
Denominator for diluted earnings/(loss) per share:
Adjusted weighted-average number of
shares and assumed conversions 3,575,958 5,975,622 5,991,504
========= ========= =========
Basic earnings/(loss) per share 10.14 3.05 ( 8.79)
========= ========= =========
Diluted earnings/(loss) per share 10.02 3.04 ( 8.79)
========= ========= =========
</TABLE>
For the year ended December 31, 1996, the weighted average number of
shares used in computing basic and diluted earnings per share were
adjusted as if the Reverse Stock Split had been completed on January 1,
1996.
Details of the stock options and warrants of the Company are set out in
note 12.
The computation of diluted earnings/(loss) per share did not assume the
conversion of the stock options in 1998 and 1997 and the warrants in
1998 because their inclusion would have been antidilutive.
F-16
<PAGE>
CHINA RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
8. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
Property and equipment comprise:
December 31,
1997 1998
-------------------------
RMB RMB
<S> <C> <C>
At cost:
Buildings and leasehold improvements 5,267 6,052
Machinery, equipment and motor vehicles 6,599 6,904
------ ------
11,866 12,956
Accumulated depreciation ( 4,370) ( 5,713)
------ ------
7,496 7,243
====== ======
</TABLE>
9. INVESTMENTS
Investments comprise:
<TABLE>
<CAPTION>
December 31,
Notes 1997 1998
-----------------------------
RMB RMB
<S> <C> <C>
Equity method investment (a) 1,743 1,659
Cost method investments (b) 145,928 117,642
------- -------
147,671 119,301
======= =======
</TABLE>
As stated in note 3, the negative goodwill arising on the acquisition
of minority interest in a subsidiary during the year of RMB7,119 was
allocated to reduce proportionately the values of the above
investments.
(a) Equity method investment represents Hainan Agricultural's 30%
equity interest in Hainan Far East Rubber Development Company
Limited ("Far East"). As at December 31, 1998, Far East had
not yet commenced operations and there is no income or loss
attributable to the equity investee.
F-17
<PAGE>
CHINA RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
9. INVESTMENTS (continued)
<TABLE>
<CAPTION>
(b) Cost method investments comprise:
December 31,
1997 1998
-------------------------
RMB RMB
<S> <C> <C> <C>
Investments in:
Hainan Sundiro Motorcycle Co., Ltd.
("Sundiro") 140,000 112,000
PRC joint venture 5,000 4,759
Others 928 883
------- -------
145,928 117,642
======= =======
</TABLE>
Cost method investments are interests in unlisted
shares/equity of PRC companies in which the Group does not
have a significant influence over their operating and
financial policies.
The investment in Sundiro represents a 5.3% equity interest.
In 1998, the Company made a deposit of RMB28,718 to Guilinyang
for the intended acquisition of an additional 3.8% equity
interest in Sundiro (the "Acquisition").
The Group originally anticipated that its relationship with
Sundiro would lead to additional procurement of materials and
supplies from the Group. Nevertheless, such expected business
relationship with Sundiro did not occur.
Based on an analysis of the opportunity cost and expected
future benefits, the Group decided not to proceed with the
Acquisition. Under the circumstances, the Group does not
believe that it will be able to recover the deposit.
Accordingly, the deposit was written-off as of December 31,
1998.
The write-off of the deposit also triggered an impairment
review of the Group's existing interest in Sundiro. As a
result, a write-down of RMB21,251 was made based on the
decline in the estimated net realizable value of the
investment below its carrying value which management believes
is other-than-temporary. The net realizable value was
estimated with reference to the quoted market price of
securities with similar, but not identical characteristics,
and adjusted for the lack of marketability of the investment.
F-18
<PAGE>
CHINA RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
10. OTHER PAYABLES AND ACCRUED LIABILITIES
<TABLE>
<CAPTION>
December 31,
1997 1998
---------------------------
RMB RMB
<S> <C> <C>
Other payables 10,060 8,748
Accrued liabilities 11,046 6,728
------ ------
21,106 15,476
====== ======
</TABLE>
11. SHARE CAPITAL
Pursuant to an exchange agreement dated as of July 22, 1996 between the
Company and the holder of the 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
for 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 U.S. , the exchange ratio of
five Restricted Common Stock for one series A preferred stock of the
Company represented an exchange at fair market values.
On June 30, 1996, the Company issued a Confidential Offshore Offering
Memorandum to offer for sale series B convertible preferred stock of
the Company (the "Share Offering") to certain non-U.S. residents in an
offshore offering in reliance upon Regulation S promulgated under the
Securities Act of 1933, as amended. As of July 8, 1996, the closing
date of the 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. Together
with a similar offshore offering in 1995, after deduction of share
offering costs, a net proceed of RMB72,520 was received on the issuance
of 1,283 shares of series B convertible preferred stock for the year
ended December 31, 1996.
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 the Reverse
Stock Split, which was made effective by the Board of Directors on
December 31, 1996.
F-19
<PAGE>
CHINA RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
11. 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. Immediately 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 a 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.
On April 1, 1997, the Company entered into an agreement (the
"Advertising and Media Agreement") with an independent public relations
company (the "PR Company"). Pursuant to that agreement, 150,000 shares
of common stock of the Company were issued and 350,000 warrants were
granted (note 12) to the PR Company as consideration for internet and
other public relations services to be provided by the PR Company.
On May 1, 1997, the Company entered into a financial consultancy
agreement with an independent financial consulting company, pursuant to
which 100,000 shares of common stock of the Company were issued as
consideration for the financial consultancy services to be rendered by
that company.
During the year ended December 31, 1998, the Company repurchased and
retired 100,000 shares of common stock of the Company as treasury stock
under its share repurchase program for a total consideration of RMB853.
F-20
<PAGE>
CHINA RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
12. STOCK OPTIONS AND WARRANTS
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) and are exercisable from
July 1, 1996 to July 1, 2005. On May 20, 1996, pursuant to a "
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 Reverse Stock Split in 1996. By virtue of that
action, the outstanding options are now exercisable beginning on May
20, 1997 until May 20, 2006. All stock options remained outstanding as
of December 31, 1998.
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 of 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.
Pro forma information regarding net income and earnings per share is
required by SFAS 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 the date of grant and the date of
subsequent modification in 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 options
of 6 years. No options were granted in 1996, 1997 and 1998.
The Black-Scholes option pricing 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 the management's opinion,
the existing models do not necessarily provide a reliable single
measure of the fair value of its stock options.
F-21
<PAGE>
CHINA RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share/option/warrant and per share/option/warrant
data)
12. STOCK OPTIONS AND WARRANTS (continued)
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,
1996 1997 1998
---------------------------------------------------
RMB RMB RMB
<S> <C> <C> <C>
Pro forma net income/(loss) 28,566 10,770 (60,101)
====== ====== ======
Pro forma earnings/(loss) per share:
Basic 8.08 1.81 ( 10.03)
====== ====== ======
Diluted 7.99 1.80 ( 10.03)
====== ====== ======
</TABLE>
The Company's stock option activities and related information for the
years ended December 31, 1998, 1997 and 1996 are summarized as follows:
<TABLE>
<CAPTION>
1996 1997 1998
Weighted Weighted Weighted
average average average
exercise exercise exercise
Options price Options price Options price
-------------------------------------------------------------------------
'000 US$ '000 US$ '000 US$
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 240 37.8 240 4.2 240 4.2
Granted - - - - - -
Exercised - - - - - -
Forfeited - - - - - -
---- ---- ----
Outstanding at end
of year 240 4.2* 240 4.2 240 4.2
==== ==== ====
</TABLE>
*Exercise price was modified in 1996.
The weighted average fair value of options modified during the year
ended December 31, 1996 was US$528 (RMB4,372).
F-22
<PAGE>
CHINA RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share/option/warrant and per share/option/warrant
data)
12. STOCK OPTIONS AND WARRANTS (continued)
All options outstanding as of December 31, 1998 have an exercise price
of US$4.2 (RMB34.78). The weighted average remaining contractual life
of those options is 7.4 years.
Warrants
Pursuant to the Advertising and Media Agreement set out in note 11,
350,000 warrants for the subscription of 350,000 shares of common stock
of the Company were granted to the PR Company on April 1, 1997. All
warrants have a term of three years from April 1, 1997 and are
exercisable on April 1, 1997.
The Company's warrants activities and related information for the years
ended December 31, 1998, 1997 and 1996 are summarized as follows:
<TABLE>
<CAPTION>
1996 1997 1998
Weighted Weighted Weighted
average average average
exercise exercise exercise
Options price Options price Options price
-------------------------------------------------------------------------
'000 US$ '000 US$ '000 US$
<S> <C> <C>
Outstanding at the
beginning of year - - - - 350 4.14
Granted - - 350 4.14 - -
Exercised - - - - - -
Forfeited - - - - - -
---- ---- ----
Outstanding at the end of
year - - 350 4.14 350 4.14
==== ==== ====
</TABLE>
- -------------------
The weighted average fair value of warrants granted during the year
ended December 31, 1997 was US$444 (RMB3,676).
Exercise prices of warrants outstanding as of December 31, 1998 ranged
from US$2.69 (RMB22.27) to US$5.50 (RMB45.54) per share. The weighted
average remaining life of those warrants is 1.2 years.
F-23
<PAGE>
CHINA RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
13. RELATED PARTY BALANCES AND TRANSACTIONS
The Group's amounts due from/to Farming Bureau and related companies
controlled by the Farming Bureau or a shareholder of the Company
comprise:
<TABLE>
<CAPTION>
December 31,
1997 1998
----------------------------
RMB RMB
<S> <C> <C>
Due from Farming Bureau 14,921 33,667
====== ======
Due from related companies:
Jin Long Corporation ("Jin Long") 23,024 16,160
Jin Huan Corporation ("Jin Huan") 6,139 3,552
Other related companies 10,881 11,090
------ ------
40,044 30,802
====== ======
Due to other related companies - 31,291
====== ======
</TABLE>
The balances with the Farming Bureau and related companies are
unsecured, interest-free and are repayable on demand.
F-24
<PAGE>
CHINA RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
13. RELATED PARTY BALANCES AND TRANSACTIONS (continued)
In addition to those transactions set out in notes 3, 9(b), 19(a) and
21, the Group had the following transactions with the Farming Bureau,
certain related companies controlled by the Farming Bureau and certain
shareholders/directors of the Company.
<TABLE>
<CAPTION>
Year ended December 31,
Notes 1996 1997 1998
--------------------------------------------------
RMB RMB RMB
<S> <C> <C> <C> <C>
Farming Bureau and related companies
controlled by the Farming Bureau:
Purchase of natural rubber (a) ( 1,438,420) ( 1,011,662) ( 386,754)
Purchase discounts received (a) 16,162 - -
Guaranteed gross profit received (a) 9,423 18,105 12,715
Net sales of materials, supplies and
other agricultural products (b) 205,694 32,117 14,252
Net sales of natural rubber - 245,934 16,121
Interest income and rental in
lieu of interest received 25,302 11,947 -
Interest expense paid - ( 1,438) ( 235)
Rental expenses paid ( 188) ( 3,948) ( 628)
Income from cost method investments 1,525 - -
Service fee paid (c) ( 5,000) - -
Management fees received (d) 6,000 - -
Handling fee paid for the trading
of natural rubber futures ( 3,451) ( 348) -
Sales commission received - 1,833 -
Transfer of assets and liabilities (e) ( 227,950) 292,560 -
Acquisition of equity interest in
Sundiro (f) - 140,000 -
Disposal of equity interest in a PRC
joint venture (f) - ( 5,000) -
========= ========= =========
Shareholders/directors of the Company:
Interest expense paid ( 271) - -
Consultancy fees paid (g) ( 2,193) ( 3,033) ( 3,783)
========= ========= =========
</TABLE>
F-25
<PAGE>
CHINA RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
13. RELATED PARTY BALANCES AND TRANSACTIONS (continued)
(a) Purchase of natural rubber
--------------------------
Pursuant to a sales and purchase agreement dated November 5,
1994 and as subsequently amended (the "S&P Agreement") amongst
Hainan Agricultural, First Goods And Materials Supply And
Sales Corporation, Second Goods And Materials Supply And Sales
Corporation (collectively the "Principal Subsidiaries") and
the Farming Bureau, the Farming Bureau agreed to guarantee the
supply of natural rubber to the Principal Subsidiaries 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 the Principal
Subsidiaries.
The Farming Bureau allows the Principal Subsidiaries 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 the
First Goods And Materials Supply And Sales Corporation and
Second Goods And Materials Supply And Sales Corporation
(collectively the "Operating Subsidiaries") on natural rubber
purchased from farms controlled by the Farming Bureau (the
"Farms").
On March 30, 1995, the Principal Subsidiaries entered into an
agreement with the Farming Bureau (the "Rubber Deposit
Agreement") pursuant to which, with effect from March 30,
1995, the Farming Bureau guaranteed the supply of a minimum of
120,000 tons (the "Guaranteed Quantity") of natural rubber for
each of the next 3 years. The Principal Subsidiaries were not
obligated to purchase the Guaranteed Quantity. In
consideration for this, the Principal Subsidiaries had
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 was offered to the Principal Subsidiaries for the
purchase of natural rubber from the Farms.
To optimize the return of its liquid funds, the Principal
Subsidiaries entered into a supplementary agreement with the
Farming Bureau in 1997 to cancel the arrangement under the
Rubber Deposit Agreement effective from January 1, 1997,
subsequent to the restructuring as detailed in note 13(e).
(b) Procurement of materials and supplies
-------------------------------------
Pursuant to the S&P Agreement, the Farming Bureau also agreed
to purchase certain products sourced by the Principal
Subsidiaries for a period of 15 years from November 5, 1994 at
prices acceptable to all parties with a first right of refusal
to the Principal Subsidiaries.
F-26
<PAGE>
CHINA RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
13. RELATED PARTY BALANCES AND TRANSACTIONS (continued)
(c) 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 and its subsidiaries
certain land use and development rights to the land on which
the warehouses, factories, and other industrial and office
facilities of the Principal Subsidiaries 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 paid to the Farming Bureau. The agreement
was terminated with effect from January 1, 1997.
(d) Management fee income from Jin Long and Jin Huan
------------------------------------------------
For the year ended December 31, 1996, management fees of
RMB3,000 and RMB3,000, respectively 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.
After the restructuring of operations in 1996, as detailed in
note 13(e) below, no such services were provided to Jin Long
and Jin Huan and accordingly, no management fee was received
in 1998 and 1997.
(e) 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 the Principal Subsidiaries were restructured
effective from October 1, 1996. The Restructuring has resulted
in the simplification of the 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. In addition, as part of the Restructuring,
bank loans of the Principal Subsidiaries were transferred to
the Farming Bureau in March 1997 when the proper approval was
obtained from the relevant banks. Despite the downsizing of
several operations, the Restructuring has not resulted in the
discontinuance of any line of business as all the operations
have been taken up by the remaining divisions.
F-27
<PAGE>
CHINA RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
13. RELATED PARTY BALANCES AND TRANSACTIONS (continued)
(e) Restructuring of operations (continued)
---------------------------
Pursuant to an Asset and Staff Transfer Agreement (the
"Transfer Agreement"), the values of the assets and
liabilities transferred were determined based on their fair
values at the effective date of transfer as determined by a
professional independent valuer in the PRC. Based on their
valuation, there were no material differences between the fair
values and the carrying values (as determined under US GAAP)
of those assets and liabilities at the date of transfer. After
the Restructuring, the Farming Bureau took over all the
transferred employees and arrangements were made with an
insurance company controlled by the Farming Bureau to transfer
the retirement plan (note 21) of those employees to the
Farming Bureau.
Based on the valuation by the independent valuer, the fair
values of assets and liabilities of the Principal Subsidiaries
that were transferred to the Farming Bureau in 1997 and 1996
were as follows:
<TABLE>
<CAPTION>
1996 1997
-------------------------
RMB RMB
<S> <C> <C>
Trade receivables 92,553 -
Other receivables, prepayments
and other current assets 42,665 -
Inventories 27,986 -
Amounts due from related companies 274,046 -
Property and equipment 15,821 -
Investments 1,961 -
Amounts due to related companies (127,458) -
Accounts payable ( 61,689) -
Other payables and accrued liabilities ( 37,935) -
Bank loans - (292,560)
------- -------
227,950 (292,560)
======= =======
Net liabilities transferred to the Farming
Bureau, recorded as an adjustment to
the amount due from the Farming Bureau ( 64,610)
=======
</TABLE>
The net credit was applied against the amount due from the
Farming Bureau.
In connection with the Restructuring and effective from
October 1, 1996, the amounts due from the Farming Bureau and
other related companies controlled by the Farming Bureau have
become interest-free. Starting from October 1, 1996, interest
expense on bank loans of the Group were borne by the Farming
Bureau until the effective transfer of the bank loans to the
Farming Bureau in March 1997.
F-28
<PAGE>
CHINA RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
13. RELATED PARTY BALANCES AND TRANSACTIONS (continued)
(f) Acquisition and disposal of equity interest in cost based
---------------------------------------------------------
investments
-----------
Pursuant to a stock purchase agreement dated December 29,
1997, the Group acquired from Guilinyang a 5.3% equity
interest in Sundiro for a total consideration of RMB140,000.
During 1997, the Group disposed its interest in a PRC joint
venture to Guilinyang for a total consideration of RMB5,000.
The purchase consideration of Sundiro and the sales proceeds
of the PRC joint venture were used to offset the amount due
from Guilinyang (note 14).
(g) 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"), which is beneficially owned by a
director 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 fee paid by Billion Luck was increased to HK$170
(RMB184) per month during May 1, 1995 to April 30, 1997. In
1997, the consultancy agreement was renewed for another three
years effective from May 1, 1997, and in consideration of the
additional advisory and coordination works to be performed,
the monthly consultancy fee was revised to HK$270 (RMB289) per
month.
(h) 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 in 1996, two
directors of the Company were also directors of the holders of
series A preferred stock and Restricted Common Stock,
respectively.
Further details of the exchanges are set out in note 11.
F-29
<PAGE>
CHINA RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
14. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
Year ended December 31,
1996 1997 1998
---------------------------------------------
RMB RMB RMB
<S> <C> <C> <C>
Cash paid during the year for:
Interest expense 28,258 2,178 53
Income tax 7,193 4,486 6,011
======= ======= =======
Non-cash investing and financing activities:
Conversion of 1,653 shares of
series B convertible preferred stock
to 4,579,004 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 13(e)), net 227,950 292,560 -
Acquisition of a minority interest in a
subsidiary (note 3) - - 7,000
Acquisition of an investment (note 13(f)) - 140,000 -
Disposal of an investment (note 13(f)) - 5,000 -
======= ======= =======
</TABLE>
F-30
<PAGE>
CHINA RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands except share and per share data)
15. 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 and cash deposits
The Group maintains its cash and cash deposits primarily with
various PRC government authorised financial institutions. The
Group performs periodic evaluations of the relative credit
standing of those financial institutions that are considered
in the Group's investment strategy.
(ii) Trade receivables
The Group sells to customers located throughout the PRC.
Concentrations of credit risk with respect to trade
receivables are 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 a
substantial portion of the amounts due from related companies,
all of which are State-owned entities controlled by the
Farming Bureau. The Group carefully assesses the
recoverability of those balances not guaranteed by the Farming
Bureau and generally does not require collateral.
The Farming Bureau is a division of the Ministry of
Agriculture of the PRC.
(iv) Cost method investments
The Group's cost method investments consist of interests in
unlisted shares/equity of PRC companies in which the Group
does not have a significant influence over their operating and
financial policies.
F-31
<PAGE>
CHINA RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
15. CONCENTRATION OF RISK (continued)
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 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.
The Group is dependent on the Farming Bureau for providing
substantially all of the supply of natural rubber. While Hainan
Agricultural and the Principal Subsidiaries have entered into an
agreement with the Farming Bureau which requires the Farming Bureau to
prioritize allocation of natural rubber in favor of the Principal
Subsidiaries, there can be no assurances that this agreement will
result in continued allocations of satisfactory supplies of natural
rubber.
Additionally, the Principal Subsidiaries are dependent upon the Farming
Bureau to purchase a significant portion of the materials and supplies
sold by the Principal Subsidiaries in their current procurement
operations. Although the Group and the Farming Bureau have entered into
the S & P Agreement which requires the Farming Bureau to purchase on a
priority basis from the Principal 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 Principal
Subsidiaries to sell any such materials or supplies to the Farming
Bureau on terms which are profitable to the Company. The S & P
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 controlled by the
Farming Bureau.
The Group enters into commodity futures contracts to hedge the price
risk associated with existing inventories and certain firm commitments
for the purchase of goods, as well as for non-hedging purposes.
F-32
<PAGE>
CHINA RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
15. CONCENTRATION OF RISK (continued)
Commodity futures contracts provide the Group with a means of managing
the risks of changing commodity prices. These contracts represent
commitments either to purchase or sell commodities at a future date and
at a specific price. The Group is subject to market risk associated
with changes in the value of the underlying commodity as well as the
risk of non-performance by futures counterparties. The gross contract
amount of futures contracts represents the extent of the Group's
involvement and the Group's maximum exposure to credit risk. All the
commodity futures contracts entered into by the Group are exchange
traded contracts. The exchange acts as the counterparty to specific
transactions and, therefore, bears the risk of delivery to and from
counterparties to specific positions.
Market risk resulting from a position in commodity futures contracts
may be offset by other on- or off-balance sheet transactions. The Group
monitors overall sensitivity to commodity price changes by analyzing
the net effect of potential changes in commodity prices on the market
value of commodity futures contracts and the related commodity. The
Group manages the credit risk of counterparty defaults by limiting the
total amount of futures contracts outstanding and by monitoring the
size and maturity structure of the futures contracts portfolio.
16. 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 amount reported in the consolidated balance
sheets for cash and cash equivalents approximate their fair
value.
(ii) Trade receivables, accounts payable and other payables
The carrying amounts reported in the balance sheet for trade
receivables, accounts payable and other payables approximate
their fair values.
(iii) Amounts due to/from the Farming Bureau and related companies
The carrying amounts are reasonable estimates of the fair
values due to the short maturity of these assets and
liabilities.
(iv) Cost method investments
The Group believed that the carrying amounts represent the
Group's best estimate of current economic values of these
investments.
F-33
<PAGE>
CHINA RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
17. RESERVES AND DISTRIBUTION OF PROFITS
The movements in reserves during the years were as follows:
<TABLE>
<CAPTION>
Collective
Surplus welfare
reserve fund Total
---------------------------------------------------
RMB RMB RMB
<S> <C> <C> <C>
Balance at December 31, 1995 4,465 4,465 8,930
Appropriation for the year 4,409 4,409 8,818
------- ------- -------
Balance at December 31, 1996 8,874 8,874 17,748
Appropriation for the year 3,883 3,883 7,766
------- ------- -------
Balance at December 31, 1997 12,757 12,757 25,514
Appropriation for the year 380 380 760
------- ------- -------
Balance at December 31, 1998 13,137 13,137 26,274
======= ======= =======
</TABLE>
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
in the form of share bonus issues.
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.
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 in the consolidated balance sheets as of
December 31, 1998, 1997 and 1996 that are available for distribution
are RMB70,615, RMB86,448 and RMB62,951, respectively.
F-34
<PAGE>
CHINA RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
18. ACCUMULATED OTHER COMPREHENSIVE INCOME/(LOSS)
The component of other comprehensive income/(loss) is as follows:
<TABLE>
<CAPTION>
Currency
translation
adjustments
-----------
RMB
<S> <C>
Balance at December 31, 1996 -
Currency translation adjustment -
-------
Balance at December 31, 1997 -
Currency translation adjustment ( 4)
-------
Balance at December 31, 1998 ( 4)
=======
</TABLE>
The earnings associated with the Group's investment in its foreign
subsidiaries are considered to be permanently invested and no provision
for U.S. federal and state income taxes on those earnings or
translation adjustments has been provided.
19. COMMITMENTS AND CONTINGENCIES
(a) Lease commitments
At December 31, 1998, future minimum payments under
non-cancellable operating leases for the leasing of buildings
in Hainan, the PRC, from the Farming Bureau and companies
controlled by the Farming Bureau consisted of the following:
<TABLE>
<CAPTION>
RMB
<S> <C> <C>
Payable in:
1999 242
2000 242
2001 170
2002 170
2003 170
Thereafter 128
-----
Total minimum lease payments 1,122
=====
</TABLE>
Rental expenses under operating leases for the years
ended December 31, 1998, 1997 and 1996 amounted to RMB242,
RMB242 and RMB188, respectively.
F-35
<PAGE>
CHINA RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
19. COMMITMENTS AND CONTINGENCIES (continued)
(b) Futures contracts
As of December 31, 1998, the Group had no open positions in
commodity futures contracts.
As of December 31, 1997, the Group had open short positions in
respect of its natural rubber commodity futures contracts,
maturing through 1998, with a notional value of RMB3,801.
20. FOREIGN CURRENCY EXCHANGE
The 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 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.
21. RETIREMENT BENEFITS
As stipulated by the PRC regulations, the Operating Subsidiaries
participate in a defined contribution retirement plan (the "Retirement
Plan") administered by a State-owned insurance company controlled by
the Farming Bureau. The Operating Subsidiaries are required to make
contributions to the Retirement Plan at a rate of 21% of the aggregate
of basic salaries, allowances and bonuses of its existing staff. All
staff of the Operating Subsidiaries 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. The Operating Subsidiaries are not responsible for
any payments beyond the contributions to the Retirement Plan as noted
above.
The amounts of contributions paid by the Operating Subsidiaries, which
were charged to the consolidated statements of income, amounted to
RMB287, RMB368 and RMB1,588 for the years ended December 31,
1998, 1997 and 1996, respectively.
F-36
<PAGE>
CHINA RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
22. VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Provision for
Provision for inventory
doubtful write-
accounts downs Total
-------------------------------------------------------
RMB RMB RMB
<S> <C> <C> <C>
Balance at December 31, 1995 - - -
Charged to costs and expenses - - -
----- ----- -----
Balance at December 31, 1996 - - -
Charged to costs and expenses - - -
----- ----- -----
Balance at December 31, 1997 - - -
Charged to costs and expenses 4,740 1,554 6,294
----- ----- -----
Balance at December 31, 1998 4,740 1,554 6,294
===== ===== =====
</TABLE>
23. SEGMENT FINANCIAL INFORMATION
Effective January 1, 1998, the Group adopted FASB Statement of
Financial Accounting Standards No. 131 "Disclosures about Segments of
an Enterprise and Related Information" ("SFAS 131") and restated 1997
and 1996 segment information to conform to the new standard. SFAS 131
superseded FASB Statement of Financial Accounting Standards No. 14
"Financial Reporting for Segments of a Business Enterprise". SFAS 131
establishes standards for the way that public business enterprises
report information about operating segments in annual financial
statements and requires that those enterprises report selected
information about operating segments in interim financial reports. SFAS
131 also establishes standards for related disclosures about products
and services, geographic areas, and major customers. The adoption of
SFAS 131 did not affect the results of operations or financial
position, but did affect the disclosure of segment information.
The Group is principally engaged in the distribution of natural rubber,
the procurement of materials and supplies, and the distribution of
other agricultural products in the PRC. The Group did not have any
export sales during the three years ended December 31, 1998, 1997 and
1996.
F-37
<PAGE>
CHINA RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
23. SEGMENT FINANCIAL INFORMATION (continued)
Description of products by segment
----------------------------------
The Group has two reportable segments: (i) rubber, and (ii) materials,
supplies and other agricultural products. The Group's rubber division
primarily sells natural rubber to manufacturers and other distributors
in the PRC. The Group's materials, supplies and other agricultural
products division primarily sells materials, supplies and other
agricultural products to farms, manufacturers and other distributors in
the PRC.
Measurement of segment profit or loss and segment assets
--------------------------------------------------------
The Group evaluates performance and allocates resources based on profit
or loss from operations before interest, gains and losses on the
Group's investment portfolio, and income taxes. The accounting policies
of the reportable segments are the same as those described in the
summary of significant accounting policies.
Intersegment sales and transfers between reportable segments are
immaterial for all the periods presented.
Factors management used to identify the Group's reportable segments
-------------------------------------------------------------------
The Group's reportable segments are business units that offer different
products. The reportable segments are each managed separately because
they distribute distinct products.
F-38
<PAGE>
CHINA RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
23. SEGMENT FINANCIAL INFORMATION (continued)
<TABLE>
<CAPTION>
Operating segment information
-----------------------------
Year ended December 31,
1996 1997 1998
------------------------------------------------
RMB RMB RMB
<S> <C> <C> <C>
Net sales to external customers:
Natural rubber:
Net sales to unaffiliated customers 1,519,060 858,211 453,952
Net sales to affiliates - 245,934 16,121
--------- --------- ---------
1,519,060 1,104,145 470,073
--------- --------- ---------
Materials, supplies and other agricultural products:
Net sales to unaffiliated customers 102,745 12,909 43,367
Net sales to affiliates 205,694 32,117 14,252
--------- --------- ---------
308,439 45,026 57,619
--------- --------- ---------
Total consolidated net sales 1,827,499 1,149,171 527,692
========= ========= =========
Depreciation and amortization expenses:
Natural rubber 1,058 1,362 1,287
Materials, supplies and other
agricultural products 747 56 45
------- ------- -------
Total segment depreciation and amortization
expenses 1,805 1,418 1,332
Reconciling item:
Depreciation and amortization expenses
attributable to corporate assets 35 39 38
------- ------- -------
Total consolidated depreciation and
amortization expenses 1,840 1,457 1,370
======= ======= =======
</TABLE>
F-39
<PAGE>
CHINA RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
23. SEGMENT FINANCIAL INFORMATION (continued)
Operating segment information (continued)
<TABLE>
<CAPTION>
Year ended December 31,
1996 1997 1998
------------------------------------------------
RMB RMB RMB
<S> <C> <C> <C>
Segment profit/(loss):
Natural rubber 45,919 61,104 3,465
Materials, supplies and other
agricultural products 63,511 4,777 ( 7,967)
--------- --------- ---------
Total segment profit/(loss) 109,430 65,881 ( 4,502)
Reconciling items:
Corporate expenses ( 7,736) ( 13,162) ( 15,852)
Loss on impairment of an
investment - - ( 49,969)
Income from cost method investments 1,525 - -
Interest income 29,602 14,849 6,862
Interest expense ( 48,495) ( 15,007) ( 289)
--------- --------- ---------
Total consolidated income/(loss) before
income taxes 84,326 52,561 ( 63,750)
========= ========= =========
December 31,
1996 1997 1998
---------------------------------------------------
RMB RMB RMB
Segment assets:
Natural rubber 542,005 222,507 258,090
Materials, supplies and other
agricultural products 134,837 87,916 16,298
------- ------- -------
Total segment assets 676,842 310,423 274,388
Reconciling items:
Corporate assets 40,211 14,084 8,046
Investments 12,344 147,671 119,301
Intersegment receivables ( 24,284) ( 34,298) ( 31,009)
------- ------- -------
Total consolidated assets 705,113 437,880 370,726
======= ======= =======
</TABLE>
F-40
<PAGE>
CHINA RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
23. SEGMENT FINANCIAL INFORMATION (continued)
<TABLE>
<CAPTION>
Operating segment information (continued)
Year ended December 31,
1996 1997 1998
---------------------------------------------
RMB RMB RMB
<S> <C> <C>
Expenditure for additions to long-lived assets:
Natural rubber - 2,884 332
Materials, supplies and other
agricultural products 2,663 - 58
------- ------- -------
Total segment expenditure for additions to
long-lived assets 2,663 2,884 390
Reconciling item:
Corporate assets - - 700
------- ------- -------
Total consolidated expenditure for
additions to long-lived assets 2,663 2,884 1,090
======= ======= =======
Long-lived assets of reportable segments and corporate assets consisted
of property and equipment.
Net sales to external customers of the materials, supplies and other
agricultural products division included the following product lines:
Year ended December 31,
1996 1997 1998
-----------------------------------------------
RMB RMB RMB
Materials and supplies 140,878 45,026 28,180
Other agricultural products 167,561 - 29,439
------- ------- -------
308,439 45,026 57,619
======= ======= =======
</TABLE>
F-41
<PAGE>
CHINA RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
23. SEGMENT FINANCIAL INFORMATION (continued)
Major customers
---------------
For the year ended December 31, 1997, sales under the distribution of
natural rubber segment to Jin Long amounted to approximately 21% of the
total net sales of the Group.
For the year ended December 31, 1998, sales under the distribution of
natural rubber segment to two unaffiliated customers, Jilin Hualin
Rubber Factory and Zhanjiang Sugar and Wine Company, amounted to
approximately 20% of the total net sales of the Group.
Except for the above, the Group did not have any major customers which
represented more than 10% of the total consolidated net sales in 1998,
1997 and 1996.
F-42
<PAGE>
EXHIBITS INDEX
Exhibit No. Exhibit Description
----------- -------------------
3.1 Articles of Incorporation of the Registrant, filed on January
15, 1986 (Filed with Annual Report on Form 10-K/A for the
fiscal year ended December 31, 1994, and incorporated herein
by reference.)
3.2 By-laws of the Registrant (Filed with Annual Report on Form
10-K/A for the fiscal year ended December 31, 1994, and
incorporated herein by reference.)
3.3 Certificate of Amendment of Articles of Incorporation of the
Registrant, filed on November 18, 1994 (Filed with Annual
Report on Form 10-K/A for the fiscal year ended December 31,
1994, and incorporated herein by reference.)
3.4 Certificate of Amendment of Articles of Incorporation of the
Registrant, filed on November 18, 1994 (Filed with Annual
Report on Form 10-K/A for the fiscal year ended December 31,
1994, and incorporated herein by reference.)
3.5 Certificate of Amendment of Articles of Incorporation of the
Registrant, effective March 31, 1995, and filed on June 19,
1995 (Filed with Quarterly Report on Form 10-Q/A for the
fiscal quarter ended March 31, 1995, and with Current Report
on Form 8-K dated June 19, 1995, and incorporated herein by
reference.)
3.6 Certificate of Amendment of Articles of Incorporation of the
Registrant, effective December 30, 1996 (Filed with Annual
Report on Form 10-K/A for the fiscal year ended December 31,
1996, and incorporated herein by reference.)
3.7 Amended and Restated By-laws of the Registrant, as amended on
December 30, 1996 (Filed with Annual Report on Form 10-K/A for
the fiscal year ended December 31, 1996, and incorporated
herein by reference.)
4.1 Certificate of Designation of Series B Convertible Preferred
Stock, filed on December 13, 1995 (Filed with Current Report
on Form 8-K dated March 8, 1996, and incorporated herein by
reference.)
4.2 Certificate of Amendment of Certificate of Designation of
Series B Convertible Preferred Stock, effective December 31,
1997 (Filed with Annual Report on Form 10-K/A for the fiscal
year ended December 31, 1996, and incorporated herein by
reference.)
10.1 Assignment Agreement dated January 21, 1994, by and between
Hong Wah (Holdings) Limited and Billion Luck Company Ltd.
(Filed with Annual Report on Form 10-K/A for the fiscal year
ended December 31, 1994, and incorporated herein by
reference.)
10.2 Contract on Investment for the Setting up of Hainan
Agricultural Resources Company Ltd. dated January 31, 1994, by
and among Hainan Province Agricultural Reclamation General
Company (the Farming Bureau), Hainan Province Guilinyang State
Farm, and Billion Luck Company Ltd. (Original Chinese version
with English translation filed with Annual Report on Form
10-K/A for the fiscal year ended December 31, 1994, and
incorporated herein by reference.)
<PAGE>
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.)
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.)
<PAGE>
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.)
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.)
<PAGE>
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 with Annual Report on Form 10-K/A for the fiscal
year ended December 31, 1996,and incorporated herein by
reference.)
10.29 Loan Agreement between HARC and the Registrant, dated March
25, 1996 (Certified English translation of original Chinese
version filed with Annual Report on Form 10-K/A for the fiscal
year ended December 31, 1996, and incorporated herein by
reference.)
<PAGE>
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 with Annual
Report on Form 10-K/A for the fiscal year ended December 31,
1996, and incorporated herein by reference.)
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 with Annual Report on Form 10-K/A for
the fiscal year ended December 31, 1996, and incorporated
herein by reference.)
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 with Annual Report on Form 10-K/A for the fiscal
year ended December 31, 1996, and incorporated herein by
reference.)
10.33 Exchange Agreement, by and between the Registrant and
Everbright Finance & Investment Co. Limited, dated December
31, 1996 (Filed with Annual Report on Form 10-K/A for the
fiscal year ended December 31, 1996, and incorporated herein
by reference.)
10.34 China Resources Development, Inc., Amended and Restated 1995
Stock Option Plan, as amended on December 30, 1996 (Filed with
Annual Report on Form 10-K/A for the fiscal year ended
December 31, 1996, and incorporated herein by reference
herewith.)
10.35 Agency Agreement on Natural Rubber Distribution between Hainan
General Bureau Jin Huan Materials Supply General Company and
HARC, dated January 2, 1997 (Certified English translation of
original Chinese version filed with Quarterly Report on Form
10-Q for the fiscal quarter ended March 31, 1997, and
incorporated herein by reference.)
10.36 Advertising and Media Agreement by and between the Registrant
and Marketing Direct Concepts, Inc., dated April 1, 1997
(Filed with Quarterly Report on Form 10-Q for the fiscal
quarter ended June 30, 1997, and incorporated herein by
reference.)
10.37 Financial Consulting Agreement by and between the Registrant
and Integrated Capital Development Group, Inc., dated May 1,
1997 (Filed with Quarterly Report on Form 10-Q for the fiscal
quarter ended June 30, 1997, and incorporated herein by
reference.)
10.38 Consulting Agreement between the Registrant and Brender
Services Limited, dated April 30, 1997 (Filed with Annual
Report on Form 10-K for the fiscal year ended December 31,
1997, and incorporated herein by reference.)
10.39 Stock Purchase Agreement, by and between HARC and Guilinyang
Farm, dated December 29, 1997 (Certified English translation
of original Chinese version filed with Annual Report on Form
10-K for the fiscal year ended December 31, 1997, and
incorporated herein by reference.)
10.40 Agreement for the Sale and Purchase of Share in Hainan Zhongya
Aluminum Company Ltd., dated December 29, 1997, by and between
First Supply and Guilinyang Farm (Certified English
translation of original Chinese version filed with Annual
Report on Form 10-K for the fiscal year ended December 31,
1997, and incorporated herein by reference.)
<PAGE>
10.41 Agreement for the Sale and Purchase of Share in Hainan
Zhongwei Agricultural Resources Company Ltd., dated April 30,
1998, by and between Guilinyang Farm and the Company
(Certified English translation of original Chinese version
filed with Quarterly Report on Form 10-Q for the fiscal
quarter ended June 30, 1998, and incorporated herein by
reference.)
10.42 Employment Agreement between the Company and Li Feilie,
dated August 1, 1998 (Filed herewith.)
10.43 Employment Agreement between the Company and Tam Cheuk Ho,
dated February 1, 1999 (Filed herewith.)
10.44 Employment Agreement between the Company and Wong Wah On,
dated February 1, 1999 (Filed herewith.)
10.45 Service Agreement between the Company and Ching Lung Po,
dated February 1, 1999 (Filed herewith.)
11.3 Computation of Earnings Per Share for Fiscal Year ended
December 31, 1998 (Contained in Financial Statements filed
herewith.)
21 Subsidiaries of the Registrant (Filed herewith.)
27.4 Financial Data Schedule (Filed herewith. For SEC use only.)
99.2 Notice of Annual Meeting, Proxy Statement and Proxy
distributed to shareholders in advance of annual meeting held
on December 15, 1998 (Filed with Schedule 14A dated November
30, 1998, and incorporated herein by reference.)
EMPLOYMENT AGREEMENT
--------------------
THIS AGREEMENT CONTAINS A BINDING ARBITRATION PROVISION WHICH MAY BE ENFORCED BY
THE PARTIES.
AGREEMENT, dated this 1st day of August 1998, by and between China
Resources Development, Inc., a limited company incorporated in the State of
Nevada (the "Company"), and Li Feilie (the "Employee")
Recitals
WHEREAS, the Company is a limited company incorporated in the State of
Nevada which beneficially holds 61% interests in Hainan Zhongwei Agricultural
Resources Company Limited, a joint stock company incorporated in the People's
Republic of China (the "PRC") which, through the operating subsidiaries, markets
and distributes natural rubber and rubber products in the PRC and sources a wide
range of commodities and production materials for sale in the PRC.
WHEREAS, the Company desires to retain the ongoing services of the
Employee, and the Employee desires to serve as the Vice President of the Company
or such capacities as the Company shall from time to time determine.
WHEREAS, the Employee is, and will be, employed by the Company in a
confidential relationship wherein the Employee, in the course of his employment
with the Company, has, and will, become familiar with and aware of information
as to the specific manner of doing business and the customers of the Company and
its affiliates and future plans with respect thereto, all of which has been
established and maintained, and will be established and maintained, at great
expense to the Company.
WHEREAS, the Employee recognizes that the Company's business is
dependent upon a number of trade secrets, the protection of which is of critical
importance to the Company.
WHEREAS, the Company will sustain great loss and economic damage if
during the term of this Agreement or the Employee's employment with the Company,
or for a period of one (1) year immediately following the termination of the
Agreement or the Employee's employment, for any reason, the Employee should
violate the provisions of Paragraphs 3 or 4 of this Agreement.
WHEREAS, monetary damages for such losses would be extremely difficult
to measure.
WHEREAS, the Company and the Employee desire to formally evidence their
relationship and the terms of employment.
NOW, THEREFORE, in consideration of the mutual promises, terms,
covenants and conditions set forth herein, and the performance of each, it is
hereby agreed as follows:
ARTICLE 1
Employment and Duties
1.01 Employment. The Company hereby employs the Employee in such
positions as may be assigned to the Employee or may be taken from the Employee
from time to time at the discretion of the Board of Directors ("Board") of the
Company. The Employee hereby accepts his employment upon the terms ad conditions
herein contained and agrees to devote his time, attention and efforts to promote
and further the business and services of the Company. The Employee shall
faithfully adhere to, execute and fulfill all policies established by the
Company.
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<PAGE>
1.02 Duties. The Employee shall perform such duties, assume such
responsibilities and devote such time, attention and energy to the business of
the Company as the Board shall from time to time require and shall not, during
the term of his employment hereunder, be engaged in any other business activity
pursued for gain, profit and other pecuniary advantage if such activity
interferes with the Employee's duties and responsibilities hereunder. However,
the foregoing limitations shall not be construed as prohibiting the Employee
from making personal investments in such form or manner as will neither require
his services in the operation or affairs of the companies or enterprises in
which such investments are made nor violate the terms of Paragraphs 3 or 4
hereof. The Employee is further expressly authorized to provide services to, be
employed by, and receive compensation from any of the Company's affiliates;
provide, however, that such services hereunder, and provided further that any
such services do not violate the provision Paragraphs 3 or 4 hereof.
1.03 Custody of Company Funds. All funds received by the Employee on
behalf of the Company, if any, shall be held in trust for the Company and shall
be delivered to the Company as soon as practical after receipt.
ARTICLE II
Compensation
2.01 Base Salary. From and after the execution of this Agreement, the
Company shall pay a base salary to the Employee in the amount of HK$540,000 per
year, payable on a monthly basis. The base salary shall be adjusted on each
anniversary during the term of this Agreement to reflect the change in the
Consumer Price Index since the previous anniversary or by such greater amount as
the Board of Directors may determine.
2.02 Expenses Reimbursement. The Company shall reimburse the Employee
for all reasonable travel, entertainment and other expenses related to his
employment by, or promotion of, the Company, the Employee shall provide a
written accounting and explanation of all expenses for which reimbursement is
sought on a monthly basis and the Company shall reimburse all such expenses
within ten (10) days following receipt of each written accounting.
2.03 Bonuses. The Employee shall be entitled to such bonuses as the
Bard shall determine from time to time in accordance with Company policy and at
the sole discretion of the Board.
2.04 Plan Participation. The Employee shall be entitled to participate
tin any and all stock option, stock bonus, pension, profit sharing, retirement
or other similar plans adopted by the Company or its parent company.
ARTICLE III
Non-Disclosure Agreement and Proprietary Information.
3.01 Proprietary Information. The Employee recognizes and acknowledges
that the information, techniques, processes, developments, work in progress,
business, list of the Company's customers and any other trade secret or other
secret or confidential information relating to Company's businesses as they may
exist from time to time, are valuable, special and unique assets of Company's
business. In addition, the Employee recognizes that the Company is continually
engaged in research, design and development of new products and innovations and
improvements to the information, techniques, processes, development trade
secrets, and other secrets and confidential matters relating to the Company's
businesses. Therefore, the Employee agrees as follows:
A. That the Employee will hold in strictest confidence and not
disclose, reproduce, publish or use in many manner, whether
during or subsequent to his employment, without the express
authorization of the Board of Directors of the Company, any
information, design, manufacturing technique, process,
business customer lists, trade secrets or any other secrets or
confidential matter relating to any aspect of Company's
business as designated from time to time by the Board of
Directors of Company, except as such disclosure or use may be
required in connection with Employee's work for the Company.
-2-
<PAGE>
B. That upon request or at the time of leaving the employ of the
Company the employee will deliver to the Company, and not keep
or deliver to anyone else, any and all notes, memoranda,
documents and, in general, any and all material relating to
the Company's business.
C. That the Board of Directors of the Company may from time to
time designate other subject matters requiring confidentiality
and secrecy which shall be deemed to be covered by the terms
of this Agreement. However, any such matters must be mutually
agreed upon by both the Board and the Employee.
3.02 Breach. In the event of a breach or threatened breach by the
Employee of the provisions of Paragraph 3.01, the Company shall be entitled to
an injunction:
A. Restraining the Employee from disclosing, in whole or in part,
any information described in Paragraph 3.01 or from rendering
any services to any person, firm, corporation association or
other entity to whom such information, in whole or in part,
ahs been disclosed or is threatened to be disclosed; and/or
B. Requiring that the Employee deliver to the Company all
information, documents, notes, memoranda any and all
discoveries or other material as described above upon the
Employee's leave of the employment of the Company. Nothing
herein shall be construed as prohibiting the Company from
pursuing other remedies available to the Company for such
breach or threatened breach, including the recovery of damages
from the Employee.
ARTICLE IV
Terms; Terminations
4.01 Term. This Agreement shall be for a term of two (2) years
commencing on 1st August, 1998 and shall continue thereafter unless and until
terminated by either the Company or the Employee as herein provided.
4.02 Termination. This Agreement and Employee's employment may be
terminated in any one of the following ways:
A. The death of Employee shall terminate the Agreement.
B. The Employee shall be entitled to terminate the Agreement by 3
months' notice in writing to the Company if any money payable
by the Company to the Employee under or pursuant to this
Agreement is not paid in full by the Company to the Employee
within a period of thirty (30) days from any written demand by
the Employee for the payment thereof.
C. The Company may terminate the Agreement after thirty (30) days
written notice to Employee for good cause, including, but
without limitation (i) the Employee's material breach of this
Agreement; (ii) the material default of the Company or its
affiliates in performing their obligations under contacts with
other persons or business entities if directly caused by
Employee; (iii) if, because of illness or physical or mental
disability or other incapacity which continues for a period in
excess of six (6) months, the Employee is unable to perform
his duties under this Agreement; (iv) the Employee's fraud
with respect to the business or affairs of the Company or its
affiliates or if the Employee is convicted of a felony; or (v)
alcohol or drug abuse by the Employee.
-3-
<PAGE>
D. This Agreement will be terminated upon (i) the sale by the
Company of all or substantially all of its assets to a bona
fide third party purchaser(s); (ii) the sale, exchange or
disposition in one transaction of fifty percent (50%) or more
of the outstanding voting securities of the Company to a bona
fide third party purchaser; (iii) a bona fide decision by the
Company to terminated its business and liquidate its assets;
or (iv) the merger or consolidation of the Company in a
transaction wherein the shareholders of the Company hold less
than fifty percent (50%) of the post-transaction shares of the
surviving entity.
4.03 Rights of Termination; Severance Payments. Upon termination of
this Agreement and the Employee's employment, the Employee shall be entitled to
receive all compensation earned under this Agreement to the date of termination.
In the event of termination pursuant to Paragraph 4.02C, the Employee shall be
entitled to, and the Company shall pay the Employee, severance pay in al amount
equal to one years' pay payable within 10 days of termination.
In the event of termination of this Agreement for any reason provided
in this Article V, other than Paragraph 4.02C or if the Employee resigns prior
to this expiration of the term of this Agreement, except as provided above, all
rights and obligations of the Company and Employee under this Agreement shall
cease immediately, except that the Employee's obligations under Paragraph 3.01,
3.01 and 4.01 herein shall survive such termination and thereafter Employee
shall have no right to receive any compensation hereunder except as set forth in
this Paragraph, or to the extent Employee is prohibited from competing under
3.01, compensation shall continue for the non-compete period.
ARTICLE V
Representations of the Employee
The Employee has represented and hereby represents and warrants to the
Company that he is not subject to any restriction or non-competition covenant in
favor of a former employer or any other person or entity and that the execution
of this Agreement by the Employee and his employment by the Company or its
affiliates and the performance of his duties hereunder will not violate or be a
breach of any agreement with former employer or any other person or entity.
Further, the Employee agrees to indemnify the Company and its affiliates for any
claim, including, but not limited to, attorney's fees and expenses of
investigation, by any such third party that such third party may now have or may
hereafter come to have against the Company or its affiliates based upon or
arising out of any non-competition agreement or invention and secrecy agreement
between the Employee and such third party.
ARTICLE VI
Holidays
The Employee shall (in addition to normal public holidays) be entitled,
at the discretion of the Company to 21 working days paid holiday in each year
during the term of his employment as such time or times as the Company may
approve.
ARTICLE VII
Miscellaneous
7.01 Complete Agreement. This Agreement is not a promise of future
employment. There are no oral representations, understandings or agreements with
the Company or any of its officers, directors or representatives covering the
same subject matter as this Agreement. This written Agreement is the final,
complete and exclusive statement and expression of the agreement between the
Company and the Employee and of all the terms of this Agreement and it cannot be
varied, contradicted or supplemented by evidence of any prior or contemporaneous
oral or written agreements. Furthermore, this Agreement supersedes any and all
prior agreements. This written agreement may not be later modified except by a
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<PAGE>
further writing signed by the Company and the Employee, and no term of this
Agreement may be waived except by writing signed by the party waiving the
benefit of such terms.
7.02 No Waiver. No waiver by the parties hereto of any default or
breach of any term, condition or covenant of this Agreement shall be deemed to
be a waiver of any subsequent default or breach of the same or any other term,
condition or covenant contained herein.
7.03 Assignment; Binding Effect. Employee understands that he has been
selected for employment by the Company on the basis of his personal
qualifications, experience and skills. The Employee agrees, therefore, that this
Agreement and the rights to his services may be assigned by the Company to
another member of the Company's affiliated group at any time without notice to
him, but that he cannot assign all or any portion of this Agreement. Subject to
the preceding two sentences, this Agreement shall be binding upon and inure to
the benefit of the parties hereto and their respective heirs, successors and
assigns. It is further understood and agreed that the Company may be merged or
consolidated with another entity and that any such entity shall automatically
succeed to the rights, powers and duties of the Company hereunder.
7.04 Notice. Whenever any notice is required hereunder, it shall be
given in writing addressed as follows:
To the Company: Room 2005, 20/F., Universal Trade Centre, 3-5A Arbuthnot Road,
Central, Hong Kong.
To the Employee: 6/F., International Hong Yun Hotel, 13 Haixiu Ave., Haikou
City, Hainan, PRC.
Notice shall be deemed given and effective ten (10) days (if overseas)
or three (3) days (if local) after the deposit in the mail of a writing
addressed as above and sent first class mail, certified, return receipt
requested, or when actually received. Either party may change the address for
notice by notifying the other party of such change in accordance with this
Section 7.04.
7.05 Severability; Headings. If any portion of this Agreement is held
invalid or inoperative, the other portions of this Agreement shall be deemed
valid and operative and, so far as is reasonable and possible, effect shall be
given to the intent manifested by the portion held invalid or inoperative. The
paragraph headings herein are for reference purposes only and are not intended
in any way to describe, interpret, define or limit the extent or intent of this
Agreement or of any part hereof.
7.06 Arbitration. Any controversy or claim arising out of or relating
to this Agreement or the breach thereof shall be settled by arbitration in the
State of Nevada.
7.07 Governing Law. This Agreement shall in all respects be construed according
to the laws of the State of Nevada.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and date herein first set forth.
CHINA RESOURCES DEVELOPMENT, INC.
By: /s/ Tam Cheuk Ho
-------------------------------
Name: Tam Cheuk Ho
Title : Chief Financial Officer
EMPLOYEE:
/s/ Li Feilie
- -------------
Li Feilie
-5-
EMPLOYMENT AGREEMENT
THIS AGREEMENT CONTAINS A BINDING ARBITRATION PROVISION WHICH MAY BE ENFORCED BY
THE PARTIES.
AGREEMENT, dated this 1st day of February 1999, by and between China
Resources Development, Inc., a limited company incorporated in the State of
Nevada (the "Company"), and Tam Cheuk Ho (the "Employee")
Recitals
WHEREAS, the Company is a limited company incorporated in the State of
Nevada which beneficially holds 61% interests in Hainan Zhongwei Agricultural
Resources Company Limited, a joint stock company incorporated in the People's
Republic of China (the "PRC") which, through the operating subsidiaries, markets
and distributes natural rubber and rubber products in the PRC and sources a wide
range of commodities and production materials for sale in the PRC.
WHEREAS, the Company desires to retain the ongoing services of the
Employee, and the Employee desires to serve as the Chief Financial Officer of
the Company or such capacities as the Company shall from time to time determine.
WHEREAS, the Employee is, and will be, employed by the Company in a
confidential relationship wherein the Employee, in the course of his employment
with the Company, has, and will, become familiar with and aware of information
as to the specific manner of doing business and the customers of the Company and
its affiliates and future plans with respect thereto, all of which has been
established and maintained, and will be established and maintained, at great
expense to the Company.
WHEREAS, the Employee recognizes that the Company's business is
dependent upon a number of trade secrets, the protection of which is of critical
importance to the Company.
WHEREAS, the Company will sustain great loss and economic damage if
during the term of this Agreement or the Employee's employment with the Company,
or for a period of one (1) year immediately following the termination of the
Agreement or the Employee's employment, for any reason, the Employee should
violate the provisions of Paragraphs 3 or 4 of this Agreement.
WHEREAS, monetary damages for such losses would be extremely difficult
to measure.
WHEREAS, the Company and the Employee desire to formally evidence their
relationship and the terms of employment.
NOW, THEREFORE, in consideration of the mutual promises, terms,
covenants and conditions set forth herein, and the performance of each, it is
hereby agreed as follows:
ARTICLE 1
Employment and Duties
1.01 Employment. The Company hereby employs the Employee in such
positions as may be assigned to the Employee or may be taken from the Employee
from time to time at the discretion of the Board of Directors ("Board") of the
Company. The Employee hereby accepts his employment upon the terms ad conditions
herein contained and agrees to devote his time, attention and efforts to promote
and further the business and services of the Company. The Employee shall
faithfully adhere to, execute and fulfill all policies established by the
Company.
-1-
<PAGE>
1.02 Duties. The Employee shall perform such duties, assume such
responsibilities and devote such time, attention and energy to the business of
the Company as the Board shall from time to time require and shall not, during
the term of his employment hereunder, be engaged in any other business activity
pursued for gain, profit and other pecuniary advantage if such activity
interferes with the Employee's duties and responsibilities hereunder. However,
the foregoing limitations shall not be construed as prohibiting the Employee
from making personal investments in such form or manner as will neither require
his services in the operation or affairs of the companies or enterprises in
which such investments are made nor violate the terms of Paragraphs 3 or 4
hereof. The Employee is further expressly authorized to provide services to, be
employed by, and receive compensation from any of the Company's affiliates;
provide, however, that such services hereunder, and provided further that any
such services do not violate the provision Paragraphs 3 or 4 hereof.
1.03 Custody of Company Funds. All funds received by the Employee on
behalf of the Company, if any, shall be held in trust for the Company and shall
be delivered to the Company as soon as practical after receipt.
ARTICLE II
Compensation
2.01 Base Salary. From and after the execution of this Agreement, the
Company shall pay a base salary to the Employee in the amount of HK$1,800,000
per year, payable on a monthly basis. The base salary shall be adjusted on each
anniversary during the term of this Agreement to reflect the change in the
Consumer Price Index since the previous anniversary or by such greater amount as
the Board of Directors may determine.
2.02 Expenses Reimbursement. The Company shall reimburse the Employee
for all reasonable travel, entertainment and other expenses related to his
employment by, or promotion of, the Company, the Employee shall provide a
written accounting and explanation of all expenses for which reimbursement is
sought on a monthly basis and the Company shall reimburse all such expenses
within ten (10) days following receipt of each written accounting.
2.03 Bonuses. The Employee shall be entitled to such bonuses as the
Bard shall determine from time to time in accordance with Company policy and at
the sole discretion of the Board.
2.04 Plan Participation. The Employee shall be entitled to participate
tin any and all stock option, stock bonus, pension, profit sharing, retirement
or other similar plans adopted by the Company or its parent company.
ARTICLE III
Non-Disclosure Agreement and Proprietary Information.
3.01 Proprietary Information. The Employee recognizes and acknowledges
that the information, techniques, processes, developments, work in progress,
business, list of the Company's customers and any other trade secret or other
secret or confidential information relating to Company's businesses as they may
exist from time to time, are valuable, special and unique assets of Company's
business. In addition, the Employee recognizes that the Company is continually
engaged in research, design and development of new products and innovations and
improvements to the information, techniques, processes, development trade
secrets, and other secrets and confidential matters relating to the Company's
businesses. Therefore, the Employee agrees as follows:
D. That the Employee will hold in strictest confidence and not
disclose, reproduce, publish or use in many manner, whether
during or subsequent to his employment, without the express
authorization of the Board of Directors of the Company, any
information, design, manufacturing technique, process,
business customer lists, trade secrets or any other secrets or
confidential matter relating to any aspect of Company's
business as designated from time to time by the Board of
-2-
<PAGE>
Directors of Company, except as such disclosure or use may be
required in connection with Employee's work for the Company.
E. That upon request or at the time of leaving the employ of the
Company the employee will deliver to the Company, and not keep
or deliver to anyone else, any and all notes, memoranda,
documents and, in general, any and all material relating to
the Company's business.
F. That the Board of Directors of the Company may from time to
time designate other subject matters requiring confidentiality
and secrecy which shall be deemed to be covered by the terms
of this Agreement. However, any such matters must be mutually
agreed upon by both the Board and the Employee.
3.02 Breach. In the event of a breach or threatened breach by the
Employee of the provisions of Paragraph 3.01, the Company shall be entitled to
an injunction:
C. Restraining the Employee from disclosing, in whole or in part,
any information described in Paragraph 3.01 or from rendering
any services to any person, firm, corporation association or
other entity to whom such information, in whole or in part,
ahs been disclosed or is threatened to be disclosed; and/or
D. Requiring that the Employee deliver to the Company all
information, documents, notes, memoranda any and all
discoveries or other material as described above upon the
Employee's leave of the employment of the Company. Nothing
herein shall be construed as prohibiting the Company from
pursuing other remedies available to the Company for such
breach or threatened breach, including the recovery of damages
from the Employee.
ARTICLE IV
Terms; Terminations
4.01 Term. This Agreement shall be for a term of two (2) years
commencing on 1st February, 1999 and shall continue thereafter unless and until
terminated by either the Company or the Employee as herein provided.
4.02 Termination. This Agreement and Employee's employment may be
terminated in any one of the following ways:
E. The death of Employee shall terminate the Agreement.
F. The Employee shall be entitled to terminate the Agreement by 3
months' notice in writing to the Company if any money payable
by the Company to the Employee under or pursuant to this
Agreement is not paid in full by the Company to the Employee
within a period of thirty (30) days from any written demand by
the Employee for the payment thereof.
G. The Company may terminate the Agreement after thirty (30) days
written notice to Employee for good cause, including, but
without limitation (i) the Employee's material breach of this
Agreement; (ii) the material default of the Company or its
affiliates in performing their obligations under contacts with
other persons or business entities if directly caused by
Employee; (iii) if, because of illness or physical or mental
disability or other incapacity which continues for a period in
excess of six (6) months, the Employee is unable to perform
his duties under this Agreement; (iv) the Employee's fraud
with respect to the business or affairs of the Company or its
-3-
<PAGE>
affiliates or if the Employee is convicted of a felony; or (v)
alcohol or drug abuse by the Employee.
H. This Agreement will be terminated upon (i) the sale by the
Company of all or substantially all of its assets to a bona
fide third party purchaser(s); (ii) the sale, exchange or
disposition in one transaction of fifty percent (50%) or more
of the outstanding voting securities of the Company to a bona
fide third party purchaser; (iii) a bona fide decision by the
Company to terminated its business and liquidate its assets;
or (iv) the merger or consolidation of the Company in a
transaction wherein the shareholders of the Company hold less
than fifty percent (50%) of the post-transaction shares of the
surviving entity.
4.03 Rights of Termination; Severance Payments. Upon termination of
this Agreement and the Employee's employment, the Employee shall be entitled to
receive all compensation earned under this Agreement to the date of termination.
In the event of termination pursuant to Paragraph 4.02C, the Employee shall be
entitled to, and the Company shall pay the Employee, severance pay in al amount
equal to one years' pay payable within 10 days of termination.
In the event of termination of this Agreement for any reason provided
in this Article V, other than Paragraph 4.02C or if the Employee resigns prior
to this expiration of the term of this Agreement, except as provided above, all
rights and obligations of the Company and Employee under this Agreement shall
cease immediately, except that the Employee's obligations under Paragraph 3.01,
3.01 and 4.01 herein shall survive such termination and thereafter Employee
shall have no right to receive any compensation hereunder except as set forth in
this Paragraph, or to the extent Employee is prohibited from competing under
3.01, compensation shall continue for the non-compete period.
ARTICLE V
Representations of the Employee
The Employee has represented and hereby represents and warrants to the
Company that he is not subject to any restriction or non-competition covenant in
favor of a former employer or any other person or entity and that the execution
of this Agreement by the Employee and his employment by the Company or its
affiliates and the performance of his duties hereunder will not violate or be a
breach of any agreement with former employer or any other person or entity.
Further, the Employee agrees to indemnify the Company and its affiliates for any
claim, including, but not limited to, attorney's fees and expenses of
investigation, by any such third party that such third party may now have or may
hereafter come to have against the Company or its affiliates based upon or
arising out of any non-competition agreement or invention and secrecy agreement
between the Employee and such third party.
ARTICLE VI
Holidays
The Employee shall (in addition to normal public holidays) be entitled,
at the discretion of the Company to 21 working days paid holiday in each year
during the term of his employment as such time or times as the Company may
approve.
ARTICLE VII
Miscellaneous
7.01 Complete Agreement. This Agreement is not a promise of future
employment. There are no oral representations, understandings or agreements with
the Company or any of its officers, directors or representatives covering the
same subject matter as this Agreement. This written Agreement is the final,
complete and exclusive statement and expression of the agreement between the
Company and the Employee and of all the terms of this Agreement and it cannot be
varied, contradicted or supplemented by evidence of any prior or contemporaneous
oral or written agreements. Furthermore, this Agreement supersedes any and all
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<PAGE>
prior agreements. This written agreement may not be later modified except by a
further writing signed by the Company and the Employee, and no term of this
Agreement may be waived except by writing signed by the party waiving the
benefit of such terms.
7.02 No Waiver. No waiver by the parties hereto of any default or
breach of any term, condition or covenant of this Agreement shall be deemed to
be a waiver of any subsequent default or breach of the same or any other term,
condition or covenant contained herein.
7.03 Assignment; Binding Effect. Employee understands that he has been
selected for employment by the Company on the basis of his personal
qualifications, experience and skills. The Employee agrees, therefore, that this
Agreement and the rights to his services may be assigned by the Company to
another member of the Company's affiliated group at any time without notice to
him, but that he cannot assign all or any portion of this Agreement. Subject to
the preceding two sentences, this Agreement shall be binding upon and inure to
the benefit of the parties hereto and their respective heirs, successors and
assigns. It is further understood and agreed that the Company may be merged or
consolidated with another entity and that any such entity shall automatically
succeed to the rights, powers and duties of the Company hereunder.
7.04 Notice. Whenever any notice is required hereunder, it shall be
given in writing addressed as follows:
To the Company: Room 2005, 20/F., Universal Trade Centre, 3-5A Arbuthnot Road,
Central, Hong Kong.
To the Employee: 14 A2, Wilshire Towers, 200 Tin Hau Temple Street, North
Point, Hong Kong
Notice shall be deemed given and effective ten (10) days (if overseas)
or three (3) days (if local) after the deposit in the mail of a writing
addressed as above and sent first class mail, certified, return receipt
requested, or when actually received. Either party may change the address for
notice by notifying the other party of such change in accordance with this
Section 7.04.
7.05 Severability; Headings. If any portion of this Agreement is held
invalid or inoperative, the other portions of this Agreement shall be deemed
valid and operative and, so far as is reasonable and possible, effect shall be
given to the intent manifested by the portion held invalid or inoperative. The
paragraph headings herein are for reference purposes only and are not intended
in any way to describe, interpret, define or limit the extent or intent of this
Agreement or of any part hereof.
7.06 Arbitration. Any controversy or claim arising out of or relating
to this Agreement or the breach thereof shall be settled by arbitration in the
State of Nevada.
7.07 Governing Law. This Agreement shall in all respects be construed
according to the laws of the State of Nevada.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and date herein first set forth.
CHINA RESOURCES DEVELOPMENT, INC.
By: /s/ Ching Lung Po
-----------------------------
Name: Ching Lung Po
Title : Chairman of the Board
EMPLOYEE:
/s/ Tam Cheuk Ho
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Tam Cheuk Ho
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EMPLOYMENT AGREEMENT
THIS AGREEMENT CONTAINS A BINDING ARBITRATION PROVISION WHICH MAY BE ENFORCED BY
THE PARTIES.
AGREEMENT, dated this 1st day of February 1999, by and between China
Resources Development, Inc., a limited company incorporated in the State of
Nevada (the "Company"), and Wong Wah On Edward (the "Employee")
Recitals
WHEREAS, the Company is a limited company incorporated in the State of
Nevada which beneficially holds 61% interests in Hainan Zhongwei Agricultural
Resources Company Limited, a joint stock company incorporated in the People's
Republic of China (the "PRC") which, through the operating subsidiaries, markets
and distributes natural rubber and rubber products in the PRC and sources a wide
range of commodities and production materials for sale in the PRC.
WHEREAS, the Company desires to retain the ongoing services of the
Employee, and the Employee desires to serve as the Financial Controller of the
Company or such capacities as the Company shall from time to time determine.
WHEREAS, the Employee is, and will be, employed by the Company in a
confidential relationship wherein the Employee, in the course of his employment
with the Company, has, and will, become familiar with and aware of information
as to the specific manner of doing business and the customers of the Company and
its affiliates and future plans with respect thereto, all of which has been
established and maintained, and will be established and maintained, at great
expense to the Company.
WHEREAS, the Employee recognizes that the Company's business is
dependent upon a number of trade secrets, the protection of which is of critical
importance to the Company.
WHEREAS, the Company will sustain great loss and economic damage if
during the term of this Agreement or the Employee's employment with the Company,
or for a period of one (1) year immediately following the termination of the
Agreement or the Employee's employment, for any reason, the Employee should
violate the provisions of Paragraphs 3 or 4 of this Agreement.
WHEREAS, monetary damages for such losses would be extremely difficult
to measure.
WHEREAS, the Company and the Employee desire to formally evidence their
relationship and the terms of employment.
NOW, THEREFORE, in consideration of the mutual promises, terms,
covenants and conditions set forth herein, and the performance of each, it is
hereby agreed as follows:
ARTICLE 1
Employment and Duties
1.01 Employment. The Company hereby employs the Employee in such
positions as may be assigned to the Employee or may be taken from the Employee
from time to time at the discretion of the Board of Directors ("Board") of the
Company. The Employee hereby accepts his employment upon the terms ad conditions
herein contained and agrees to devote his time, attention and efforts to promote
and further the business and services of the Company. The Employee shall
faithfully adhere to, execute and fulfill all policies established by the
Company.
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1.02 Duties. The Employee shall perform such duties, assume such
responsibilities and devote such time, attention and energy to the business of
the Company as the Board shall from time to time require and shall not, during
the term of his employment hereunder, be engaged in any other business activity
pursued for gain, profit and other pecuniary advantage if such activity
interferes with the Employee's duties and responsibilities hereunder. However,
the foregoing limitations shall not be construed as prohibiting the Employee
from making personal investments in such form or manner as will neither require
his services in the operation or affairs of the companies or enterprises in
which such investments are made nor violate the terms of Paragraphs 3 or 4
hereof. The Employee is further expressly authorized to provide services to, be
employed by, and receive compensation from any of the Company's affiliates;
provide, however, that such services hereunder, and provided further that any
such services do not violate the provision Paragraphs 3 or 4 hereof.
1.03 Custody of Company Funds. All funds received by the Employee on
behalf of the Company, if any, shall be held in trust for the Company and shall
be delivered to the Company as soon as practical after receipt.
ARTICLE II
Compensation
2.01 Base Salary. From and after the execution of this Agreement, the
Company shall pay a base salary to the Employee in the amount of HK$1,200,000
per year, payable on a monthly basis. The base salary shall be adjusted on each
anniversary during the term of this Agreement to reflect the change in the
Consumer Price Index since the previous anniversary or by such greater amount as
the Board of Directors may determine.
2.02 Expenses Reimbursement. The Company shall reimburse the Employee
for all reasonable travel, entertainment and other expenses related to his
employment by, or promotion of, the Company, the Employee shall provide a
written accounting and explanation of all expenses for which reimbursement is
sought on a monthly basis and the Company shall reimburse all such expenses
within ten (10) days following receipt of each written accounting.
2.03 Bonuses. The Employee shall be entitled to such bonuses as the
Bard shall determine from time to time in accordance with Company policy and at
the sole discretion of the Board.
2.04 Plan Participation. The Employee shall be entitled to participate
tin any and all stock option, stock bonus, pension, profit sharing, retirement
or other similar plans adopted by the Company or its parent company.
ARTICLE III
Non-Disclosure Agreement and Proprietary Information.
3.01 Proprietary Information. The Employee recognizes and acknowledges
that the information, techniques, processes, developments, work in progress,
business, list of the Company's customers and any other trade secret or other
secret or confidential information relating to Company's businesses as they may
exist from time to time, are valuable, special and unique assets of Company's
business. In addition, the Employee recognizes that the Company is continually
engaged in research, design and development of new products and innovations and
improvements to the information, techniques, processes, development trade
secrets, and other secrets and confidential matters relating to the Company's
businesses. Therefore, the Employee agrees as follows:
G. That the Employee will hold in strictest confidence and not
disclose, reproduce, publish or use in many manner, whether
during or subsequent to his employment, without the express
authorization of the Board of Directors of the Company, any
information, design, manufacturing technique, process,
business customer lists, trade secrets or any other secrets or
confidential matter relating to any aspect of Company's
business as designated from time to time by the Board of
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Directors of Company, except as such disclosure or use may be
required in connection with Employee's work for the Company.
H. That upon request or at the time of leaving the employ of the
Company the employee will deliver to the Company, and not keep
or deliver to anyone else, any and all notes, memoranda,
documents and, in general, any and all material relating to
the Company's business.
I. That the Board of Directors of the Company may from time to
time designate other subject matters requiring confidentiality
and secrecy which shall be deemed to be covered by the terms
of this Agreement. However, any such matters must be mutually
agreed upon by both the Board and the Employee.
3.02 Breach. In the event of a breach or threatened breach by the
Employee of the provisions of Paragraph 3.01, the Company shall be entitled to
an injunction:
E. Restraining the Employee from disclosing, in whole or in part,
any information described in Paragraph 3.01 or from rendering
any services to any person, firm, corporation association or
other entity to whom such information, in whole or in part,
ahs been disclosed or is threatened to be disclosed; and/or
F. Requiring that the Employee deliver to the Company all
information, documents, notes, memoranda any and all
discoveries or other material as described above upon the
Employee's leave of the employment of the Company. Nothing
herein shall be construed as prohibiting the Company from
pursuing other remedies available to the Company for such
breach or threatened breach, including the recovery of damages
from the Employee.
ARTICLE IV
Terms; Terminations
4.01 Term. This Agreement shall be for a term of two (2) years
commencing on 1st February, 1999 and shall continue thereafter unless and until
terminated by either the Company or the Employee as herein provided.
4.02 Termination. This Agreement and Employee's employment may be
terminated in any one of the following ways:
I. The death of Employee shall terminate the Agreement.
J. The Employee shall be entitled to terminate the Agreement by 3
months' notice in writing to the Company if any money payable
by the Company to the Employee under or pursuant to this
Agreement is not paid in full by the Company to the Employee
within a period of thirty (30) days from any written demand by
the Employee for the payment thereof.
K. The Company may terminate the Agreement after thirty (30) days
written notice to Employee for good cause, including, but
without limitation (i) the Employee's material breach of this
Agreement; (ii) the material default of the Company or its
affiliates in performing their obligations under contacts with
other persons or business entities if directly caused by
Employee; (iii) if, because of illness or physical or mental
disability or other incapacity which continues for a period in
excess of six (6) months, the Employee is unable to perform
his duties under this Agreement; (iv) the Employee's fraud
with respect to the business or affairs of the Company or its
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affiliates or if the Employee is convicted of a felony; or (v)
alcohol or drug abuse by the Employee.
L. This Agreement will be terminated upon (i) the sale by the
Company of all or substantially all of its assets to a bona
fide third party purchaser(s); (ii) the sale, exchange or
disposition in one transaction of fifty percent (50%) or more
of the outstanding voting securities of the Company to a bona
fide third party purchaser; (iii) a bona fide decision by the
Company to terminated its business and liquidate its assets;
or (iv) the merger or consolidation of the Company in a
transaction wherein the shareholders of the Company hold less
than fifty percent (50%) of the post-transaction shares of the
surviving entity.
4.03 Rights of Termination; Severance Payments. Upon termination of
this Agreement and the Employee's employment, the Employee shall be entitled to
receive all compensation earned under this Agreement to the date of termination.
In the event of termination pursuant to Paragraph 4.02C, the Employee shall be
entitled to, and the Company shall pay the Employee, severance pay in al amount
equal to one years' pay payable within 10 days of termination.
In the event of termination of this Agreement for any reason provided
in this Article V, other than Paragraph 4.02C or if the Employee resigns prior
to this expiration of the term of this Agreement, except as provided above, all
rights and obligations of the Company and Employee under this Agreement shall
cease immediately, except that the Employee's obligations under Paragraph 3.01,
3.01 and 4.01 herein shall survive such termination and thereafter Employee
shall have no right to receive any compensation hereunder except as set forth in
this Paragraph, or to the extent Employee is prohibited from competing under
3.01, compensation shall continue for the non-compete period.
ARTICLE V
Representations of the Employee
The Employee has represented and hereby represents and warrants to the
Company that he is not subject to any restriction or non-competition covenant in
favor of a former employer or any other person or entity and that the execution
of this Agreement by the Employee and his employment by the Company or its
affiliates and the performance of his duties hereunder will not violate or be a
breach of any agreement with former employer or any other person or entity.
Further, the Employee agrees to indemnify the Company and its affiliates for any
claim, including, but not limited to, attorney's fees and expenses of
investigation, by any such third party that such third party may now have or may
hereafter come to have against the Company or its affiliates based upon or
arising out of any non-competition agreement or invention and secrecy agreement
between the Employee and such third party.
ARTICLE VI
Holidays
The Employee shall (in addition to normal public holidays) be entitled,
at the discretion of the Company to 21 working days paid holiday in each year
during the term of his employment as such time or times as the Company may
approve.
ARTICLE VII
Miscellaneous
7.01 Complete Agreement. This Agreement is not a promise of future
employment. There are no oral representations, understandings or agreements with
the Company or any of its officers, directors or representatives covering the
same subject matter as this Agreement. This written Agreement is the final,
complete and exclusive statement and expression of the agreement between the
Company and the Employee and of all the terms of this Agreement and it cannot be
varied, contradicted or supplemented by evidence of any prior or contemporaneous
oral or written agreements. Furthermore, this Agreement supersedes any and all
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prior agreements. This written agreement may not be later modified except by a
further writing signed by the Company and the Employee, and no term of this
Agreement may be waived except by writing signed by the party waiving the
benefit of such terms.
7.02 No Waiver. No waiver by the parties hereto of any default or
breach of any term, condition or covenant of this Agreement shall be deemed to
be a waiver of any subsequent default or breach of the same or any other term,
condition or covenant contained herein.
7.03 Assignment; Binding Effect. Employee understands that he has been
selected for employment by the Company on the basis of his personal
qualifications, experience and skills. The Employee agrees, therefore, that this
Agreement and the rights to his services may be assigned by the Company to
another member of the Company's affiliated group at any time without notice to
him, but that he cannot assign all or any portion of this Agreement. Subject to
the preceding two sentences, this Agreement shall be binding upon and inure to
the benefit of the parties hereto and their respective heirs, successors and
assigns. It is further understood and agreed that the Company may be merged or
consolidated with another entity and that any such entity shall automatically
succeed to the rights, powers and duties of the Company hereunder.
7.04 Notice. Whenever any notice is required hereunder, it shall be
given in writing addressed as follows:
To the Company: Room 2005, 20/F., Universal Trade Centre, 3-5A Arbuthnot Road
Central, Hong Kong.
To the Employee: Flat A, 9/F., Toweer 9, South Horizon Drive, South Horizons,
Hong Kong
Notice shall be deemed given and effective ten (10) days (if overseas)
or three (3) days (if local) after the deposit in the mail of a writing
addressed as above and sent first class mail, certified, return receipt
requested, or when actually received. Either party may change the address for
notice by notifying the other party of such change in accordance with this
Section 7.04.
7.05 Severability; Headings. If any portion of this Agreement is held
invalid or inoperative, the other portions of this Agreement shall be deemed
valid and operative and, so far as is reasonable and possible, effect shall be
given to the intent manifested by the portion held invalid or inoperative. The
paragraph headings herein are for reference purposes only and are not intended
in any way to describe, interpret, define or limit the extent or intent of this
Agreement or of any part hereof.
7.06 Arbitration. Any controversy or claim arising out of or relating
to this Agreement or the breach thereof shall be settled by arbitration in the
State of Nevada.
7.07 Governing Law. This Agreement shall in all respects be construed
according to the laws of the State of Nevada.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and date herein first set forth.
CHINA RESOURCES DEVELOPMENT, INC.
By: /s/ Ching Lung Po
-----------------------------
Name: Ching Lung Po
Title : Chairman of the Board
EMPLOYEE:
/s/ Wong Wah On Edward
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Wong Wah On Edward
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Service Agreement between the Company and Ching Lung Po,
dated February 1, 1999.
Dated the 1st day of February, 1999
CHINA RESOURCES DEVELOPMENT, INC
AND
CHING LUNG PO
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SERVICE AGREEMENT
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THIS AGREEMENT is made the 1st day of February, 1999.
BETWEEN
(1) CHINA RESOURCES DEVELOPMENT, INC. a company incorporated in the State of
Nevada; and
(2) CHING LUNG PO (the "Director").
BY WHICH IT IS AGREED as follows:-
1. Purpose and interpretation
(A) This Agreement sets out the terms and conditions upon and subject
to which the Company agrees to employ the Director and the
Director agrees to serve the Company as a Chief Executive Officer
by providing the Company with the services hereinafter described.
(B) (1) In this Agreement, unless the context otherwise requires, the
following words and expressions bear the following meanings:-
"Appointment" the appointment of the Director as an
executive director of the Company as effected
by Clause 2;
"Board" the board of directors for the time being of
the Company or the directors present at any
meeting of the Board duly convened and held;
"Business" the business carried on by the Group from
time to time; "Group" the Company and its
subsidiaries and associated companies from
time to time;
"$" Hong Kong dollars.
(2) References to Clauses and Schedule are references to the clauses and
schedule of or to this Agreement.
(3) References to the masculine gender include references to the feminine
gender and the neuter and vice versa.
(4) References to persons include references to individuals, firms,
companies, corporations and unincorporated bodies of persons and vice
versa.
(5) References to the singular number include references to the plural and
vice versa.
(6) The headings in this Agreement are for convenience only and do not
affect he interpretation hereof.
2. Appointment and duties
The Company shall employ the Director and the Director shall serve the
Company as a Chief Executive Officer subject to and upon the terms
hereinafter set out.
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3. Director's basic obligation
The Director hereby undertakes with the Company during the term of this
Agreement to use his best endeavours to carry out his duties hereunder
and to protect and promote the interests of the Group.
4. Duration of the appointment
Subject to Clause 7, this Agreement shall be for a term of two years
commencing on 1st February, 1999 and shall continue thereafter unless
and until terminated by either the Company or the Director giving to
the other 3 months' notice in writing to determine the same, such
notice to expire at any time on or after 1st February, 2001.
5. Director's services
The Director shall:-
(1) devote substantially the whole of his time, attention and
skill to the discharge of duties of his office as an executive
director of the Company;
(2) faithfully and diligently perform such duties and exercise
such powers as are consistent with his office in relation to
the Company and/or the Group;
(3) in the discharge of such duties and in the exercise of such
powers observe and comply with all reasonable and lawful
resolutions regulations and directions from time to time made
or given by the Board;
(4) in pursuance of his duties hereunder perform such services for
the Group and (without further remuneration unless otherwise
agreed) accept such offices in the Group as the Board may from
time to time reasonably require provided the same are
consistent with his office;
(5) at all times keep the Board promptly and fully informed in
connection with the performance of such powers and duties;
(6) as part of, and in the normal course of, his duties under this
Agreement the Director will be concerned to carry on research
into and development of the processes, products, designs,
equipment, techniques and projects from time to time used,
made or undertaken by the Group or which can be used, made or
undertaken by the Group, and to invent, discover, design,
develop or improve processes, products, designs, equipment and
techniques for the benefit of and for use by the Group; and
(7) carry out his duties and exercise his powers jointly with
another director or executive as may from time to time be
appointed by the Board to act jointly with the Director and
the Board may at any time require the Director to cease
performing or exercising any of his duties or powers under
this Agreement or pursuant to the bye-laws of the Company; and
(8) perform and exercise his duties and powers under this
Agreement in any place in Hong Kong or any other part of the
world as the Board may request or as the interests, needs,
business and opportunities of the Company or other company in
the Group will require or make advisable.
6. Remuneration and reimbursement
(A) From and after the execution of this Agreement, the Director
shall receive during the term of this Agreement as stipulated
herein:
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(1) a base salary in the amount of HK$2,160,000 per annum,
such salary to accrue on a day to day basis and payable
on a monthly basis.
(2) bonuses as determined by the Board at its sole
discretion and in accordance with the Company policy.
(B) The Director shall be reimbursed all reasonable out-of-pocket
expenses (including expenses of entertainment subsistence and
travelling) properly and reasonably incurred by him on the
Group's business which expenses shall be evidenced in such
manner as the Board may require.
(C) The Director shall be entitled to participate in any and all
stock option, stock bonus, pension, profit sharing, retirement
or other similar plans adopted by the Company.
7. Termination of the appointment
(A) Without prejudice to the accrued rights (if any) or remedies
of either party under or pursuant to this Agreement:-
(1) the Director shall be entitled to terminate the
Appointment by 3 months' notice in writing to the
Company if any money payable by the Company to the
Director under or pursuant to this Agreement is not paid
in full by the Company to the Director within a period
of 30 days from any written demand by the Director for
the payment thereof;
(2) the Company shall be entitled to terminate the
Appointment without any compensation to the Director:-
(a) by not less than 3 months' notice in writing given
at any time while the Director shall have been
incapacitated or prevented by reason of ill health,
injury or accident from performing his duties
hereunder for a period of or periods aggregating 90
days in the preceding 12 months, provided that if at
any time during the currency of a notice given
pursuant to this sub-paragraph the Director shall
provide a medical certificate satisfactory to the
Board to the effect that he has fully recovered his
physical and/or mental health and that no recurrence
of illness or incapacity can reasonably be
anticipated the Company shall withdraw such notice;
or
(b) by summary notice in writing if the Director shall
at any time:-
(1) commit any serious or persistent breach of any
of the provisions herein contained;
(2) be guilty of any grave misconduct or wilful
neglect in the discharge of his duties hereunder
or refuse to carry out any reasonable and lawful
order given to him by the Board in the course of
his Appointment;
(3) become bankrupt or have a receiving order made
against him or suspend payment or compound with
his creditors generally;
(4) become a lunatic or of unsound mind;
(5) absent himself from the meetings of the Board
during a continuous period of 3 months, without
special leave of absence from the Board, and his
alternate director (if any) shall not during such
period have attended in his stead;
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(6) be guilty of conduct tending to bring himself or
any company in the Group into disrepute;
(7) being a director of the Company or otherwise, be
prohibited by law from fulfilling his duties
hereunder;
(8) be convicted of any criminal offence (other than
an offence which in the reasonable opinion of the
Board does not affect his position as a director
of the Company); or
(9) improperly divulge to any unauthorized person
any business secret or secret details of the
organization, business or clientele of the Group.
(B) If the Company becomes entitled to terminate the Appointment
pursuant to sub-clause 7(A)(2)(b) it shall be entitled (but
without prejudice to its right subsequently to terminate the
Appointment on the same or any other ground) to suspend the
Director without payment of salary for so long as it may think
fit.
(C) If the Director shall have refused or failed to agree to
accept without reasonable grounds an appointment offered to
him on terms no less favorable to him than the terms in effect
under this Agreement, either by a company which has acquired
or agreed to acquire the whole or substantially the whole of
the undertaking and assets of the Company or which shall own
or has agreed to acquire the whole or not less than 90% of the
issued share capital of the Company, the Director shall have
no claim against the Company by reason of the subsequent
voluntary winding up of the Company or of the disclaimer or
termination of this Agreement by the Company within 3 months
after such refusal or failure to agree.
(D) On the termination of the Appointment howsoever arising the
Director shall:-
(1) at any time and from time to time thereafter at the
request of the Company resign from office as a director
of the Company and all offices held by him in any
company in the Group and shall transfer without payment
to the Company or as the Company may direct any
qualifying shares provided by it and the Director hereby
irrevocably appoints the Company to be his attorney and
in his name and on his behalf to sign and do any
documents or things necessary or requisite to give
effect thereto and a certificate in writing signed by
any director or by the secretary of the Company that any
instrument or act falls within the authority hereby
conferred shall be conclusive evidence that such is the
case and any third party shall be entitled to rely on
such certificate without further enquiry provided
however that such resignation or resignations shall be
given and accepted on the footing that it is or they are
without prejudice to any claims which the Director may
have against any such company or which any such company
may have against the Director arising out of this
Agreement or of the termination of the Appointment;
(2) forthwith deliver to the Company all books, documents,
papers, materials, credit cards and other property of or
relating to the business of the Group which may then be
in his possession or under his power or control; and
(3) not at any time thereafter represent himself still to be
connected with the Company or any other company in the
Group.
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(E) Save as expressly provided herein, neither party may terminate
this Agreement. No delay and forbearance by the Company in
exercising any such right of termination in Clause 7(A)(2)
shall constitute a waiver of that right.
8. Restrictions on the Director
(A) During the Appointment, the Director shall not be directly or
indirectly engaged in or concerned with or interested in any
business which is in any respect in competition with or
similar to the Business.
(B) The Director shall not either during or after the termination
of the Appointment without limit in point of time except
authorized or required by his duties:-
(1) divulge or communicate to any person except to those of
the officials of the Group whose province it is to know
the same; or
(2) use for his own purpose or for any purpose other than
that of the Group; or
(3) through any failure to exercise all due care and
diligence cause any unauthorized disclosure of any
secret confidential or private information:-
(a) relating to the dealings, organization, business,
finance, transactions or any other affairs of the
Group or its clients or customers; or
(b) relating to the working of any process or invention
which is carried on or used by any company in the
Group or which he may discover or make during his
Appointment; or
(c) in respect of which any company within the Group is
bound by an obligation of confidence to any third
party
but so that these restrictions shall cease to apply to any
information or knowledge which may become available to the
public generally without requiring a significant expenditure
of labour skill or money.
(C) The Director agrees that, for a period of six months after the
expiry or the termination of the Appointment, he will not:-
(1) engage or be engaged whether directly or indirectly in
any business which is in competition with or similar to
the Business or take employment with any person, firm,
company or organization engaged in or operating such
business or assist any such person, firm, company or
organization with technical, commercial or professional
advice in relation to such business;
(2) either on his own account or for any person, firm,
company or organization solicit or entice or endeavour
to solicit or entice away from any company within the
Group any director, manager or servant of any company in
the Group whether or not such person would commit any
breach of his contract of employment by reason of
leaving the service of the relevant company in the
Group;
(3) directly or indirectly employ any person who has at any
time during the currency of the Appointment been a
director, manager or servant of or consultant to any
company in the Group and who by reason of such
employment is or may be likely to be in possession of
such information which if that person was the Director
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would be covered by the confidential restrictions of
this Clause 8; and
(4) either on his own account or for any person, firm,
company or organization solicit business from any
person, firm, company or organization which at any time
the currency of the Appointment has dealt with the
Company or any other company in the Group or which on
the termination of the Appointment is in the process of
negotiating with the Company or any such company in the
Group in relation to the Business.
(D) Since the Director may obtain in the course of the Appointment
by reason of services rendered for or offices held in any
other company in the Group knowledge of the trade secrets or
other confidential information of such company, the Director
hereby agrees that he will at the request and cost of the
Company or such other company enter into a direct agreement or
undertaking with such company whereby he will accept
restrictions corresponding to the restrictions herein
contained (or such of them as may be appropriate in the
circumstances) in relation to such products and services and
such area and for such period as such company may reasonably
require for the protection of its legitimate interests.
(E) All notes, memoranda, records and writings made by the
Director in relation to the Business or concerning any of its
dealings or affairs or the dealings or affairs of any clients
or customers of the Group shall be and remain the property of
the Group and shall be handed over by him to the Company (or
to such other company in the Group as the case may require)
from time to time on demand and in any event upon his leaving
the service of the Company and the Director shall not retain
any copy thereof.
(F) While the restrictions contained in this Clause are considered
by the parties to be reasonable in all the circumstances it is
recognized that restrictions of the nature in question may
fail for technical reasons unforeseen and accordingly it is
hereby agreed and declared that if any such restrictions shall
be adjudged to be void as going beyond what is reasonable in
all the circumstances for the protection of the interests of
the Company but would be valid if part of the wording thereof
were deleted or the periods (if any) thereof were reduced the
said restriction shall apply with such modifications as may be
necessary to make it valid and effective.
9. Copyright and design right
(A) If during his employment hereunder the Director in the course
of his normal duties or other duties specifically assigned to
him (whether or not during normal working hours) wither alone
or in conjunction with any other person
(i) originates any design (whether registrable or not) or
other work in which copyright or design right may
subsist and/or
(ii) makes, discovers or produces any invention, process or
development
he shall forthwith disclose the same to the Company and shall
(subject to sub-clauses 9(B), 9(C) and 9(D)) regard himself in
relation thereto as a trustee for the Company.
(B) The Director hereby agrees to assign wholly and absolutely the
copyright, future copyright, design right and future design
right and other proprietary rights if any for the full term
thereof throughout the world in respect of all copyright works
written, originated, conceived or made by the Director during
the period of his employment to the Company to hold absolutely
including the right to sue for damages for past infringements.
-7-
<PAGE>
(C) The Director acknowledges that the Company shall be treated as
the original proprietor of a design, where such design is
created by him in the course of his employment.
(D) Any such invention, process or development will be the
absolute property of the Company and the Director will, if and
when required by the Company (whether during the continuance
of his employment or afterwards) at its expense, apply or join
with the Company in applying, for letter patent or other
protection in any part of the world for any invention process
or development.
(E) The Director agrees and undertakes that he will execute such
deeds or documents and do all such acts and things as may be
necessary or desirable to substantiate and maintain the rights
of the Company in respect of the matters referred to in
sub-clauses 9(A) to 9(D).
(F) The Director irrevocably appoints the Company as his attorney
in his name and on his behalf to execute all documents and do
all things required in order to give full effect to the
provisions of this clause.
10. Holidays
The Director shall (in addition to normal public holidays) be entitled,
at the discretion of the Company to 21 working days paid holiday in
each year during the continuance of the Appointment to be taken as such
time or times as the Board may approve.
11. Waiver
(A) Time is the essence of this Agreement but no failure or delay
on the part of either party to exercise any power, right or
remedy hereunder shall operate as a waiver thereof, nor shall
any single or partial exercise by either party of any power,
right or remedy preclude any other or further exercise thereof
or the exercise of any other power right or remedy by that
party.
(B) The remedies provided herein are cumulative and are not
exclusive of any remedies provided by law.
12. Notices
All notices, requests, demands, consents or other communications to or
upon the parties under or pursuant to this Agreement shall be in
writing addressed to the relevant party at such party's address set out
below (or at such other address as such party may hereafter specify to
the other party) and shall be deemed to have been duly given or made:-
(i) in the case of a communication by letter 10 days (if overseas)
or 48 hours (if local) after despatch or, if such letter is
delivered by hand, on the day of delivery;
(ii) in the case of a communication by telex or facsimile, when
sent.
The Company's address: Room 2005, 20/F., Universal Trade Centre, 3-5A
Arbuthnot Road, Central, Hong Kong.
The Director's address: Room 1015, Block M, Telford Gardens, Kowloon
Bay, Kowloon, Hong Kong
13. Assignability
This Agreement shall be binding upon and enure to the benefit of each
party hereto and its successors and assigns and personal
-8-
<PAGE>
representatives (as the case may be), provided always that the Director
may not assign his obligations and liabilities under this Agreement
without the prior written consent of the Company.
14. Relationship
None of the provisions of this Agreement shall be deemed to constitute
a partnership or joint venture between the parties for any purpose.
15. Amendment
This Agreement may not be amended, supplemented or modified except by a
written agreement or instrument signed by or on behalf of the parties
hereto.
16. Severability
Any provision of this Agreement prohibited by or unlawful or
unenforceable under any applicable law actually applied by any court of
competent jurisdiction shall, to the extent required by such law, be
severed from this Agreement and rendered ineffective so far as is
possible without modifying the remaining provisions of this Agreement.
Where, however, the provisions of any such applicable law may be
waived, they are hereby waived by the parties to the full extent
permitted by such law to the end that this Agreement shall be a valid
and binding agreement enforceable in accordance with its terms.
17. Law and jurisdiction
This Agreement shall be governed by and construed in all respects in
accordance with the laws of the State of Nevada and the parties hereby
submit to the non-exclusive jurisdiction of the courts of the State of
Nevada.
-9-
<PAGE>
IN WITNESS whereof this Agreement has been duly executed the day and year first
above written.
CHINA RESOURCES DEVELOPMENT, INC.
By: /s/ Tam Cheuk Ho
-------------------------------
Name : Tam Cheuk Ho
Title : Chief Financial Officer
/s/ Ching Lung Po
- -----------------
Ching Lung Po
-10-
<TABLE>
<CAPTION>
Subsidiaries of the Registrant
Name Jurisdiction of Incorporation Percentage Ownership
- ---- ----------------------------- --------------------
<S> <C> <C>
Billion Luck Company Ltd. British Virgin Islands 100%
Hainan Zhongwei Agricultural Resources People's Republic of China 61% (5% held by the
Co. Ltd. Registrant and 56% held
by Billion Luck)
First Goods and Materials Supply and People's Republic of China 100% (held by HARC)
Sales Corporation
Second Goods and Materials Supply and People's Republic of China 100% (held by HARC)
Sales Corporation
Hainan Zhongwei Trading Company Ltd. People's Republic of China 99% (held by HARC)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the Form
10-K report of China Resources Development, Inc. for the year ended December 31,
1998 and is qualified in its entirety by reference to such report.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> RENMINBI YUAN
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 8.28
<CASH> 129,238
<SECURITIES> 0
<RECEIVABLES> 8,992
<ALLOWANCES> 529
<INVENTORY> 10,569
<CURRENT-ASSETS> 243,188
<PP&E> 12,956
<DEPRECIATION> 5,713
<TOTAL-ASSETS> 370,726
<CURRENT-LIABILITIES> 75,337
<BONDS> 0
0
27
<COMMON> 50
<OTHER-SE> 187,368
<TOTAL-LIABILITY-AND-EQUITY> 370,726
<SALES> 527,692
<TOTAL-REVENUES> 538,352
<CGS> 510,631
<TOTAL-COSTS> 510,631
<OTHER-EXPENSES> 91,471
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (63,750)
<INCOME-TAX> 0
<INCOME-CONTINUING> (63,750)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (52,671)
<EPS-PRIMARY> (8.79)
<EPS-DILUTED> (8.79)
</TABLE>
