-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GRbe7OFHJgQC8cp4/9nXgKoQxp13p8nsnXJq1HOfUmC+9MtgKWGUe7wzRDji9XFo uhGk69ZszMjbmBLWvr0M9g== 0001042910-98-000294.txt : 19980416 0001042910-98-000294.hdr.sgml : 19980416 ACCESSION NUMBER: 0001042910-98-000294 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980415 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CHINA RESOURCES DEVELOPMENT INC CENTRAL INDEX KEY: 0000793628 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-MISCELLANEOUS NONDURABLE GOODS [5190] IRS NUMBER: 870263643 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-26046 FILM NUMBER: 98594864 BUSINESS ADDRESS: STREET 1: 23/F OFFICE TOWER, CONVENTION PLAZA STREET 2: 1 HARBOUR ROAD CITY: WANCHAI STATE: K3 ZIP: 84119 BUSINESS PHONE: 011-852-2810-7205 MAIL ADDRESS: STREET 1: C/O BAKER & HOSTETLER STREET 2: P O BOX 112 CITY: ORLANDO STATE: FL ZIP: 32802 FORMER COMPANY: FORMER CONFORMED NAME: MAGENTA CORP DATE OF NAME CHANGE: 19940217 10-K 1 ================================================================================ 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, 1997 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.) 23/F Office Tower, Convention Plaza 1 Harbour Road, Wanchai, Hong Kong Telephone: 011-852-2810-7205 (Address and telephone number of principal executive offices) Securities registered under Section 12(b) of the Exchange Act: None ---- Securities registered under Section 12(g) of the Exchange Act: Common Stock, $.001 par value ----------------------------- (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ---- ---- Indicate by check mark if disclosure of delinquent filers in pursuant to Item 405 of Regulation S-K (Section 229.405) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 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.): $10,209,795 as of March 31, 1998. 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. 6,029,004 shares of Common Stock, $.001 par value (as of March 31, 1998). DOCUMENTS INCORPORATED BY REFERENCE: Definitive Proxy Statement for 1997 Annual Meeting of Shareholders (Schedule 14A) is incorporated by reference in Part I, Item 4, hereof. ================================================================================ CONVENTIONS Unless otherwise specified, all references in this report to "U.S. Dollars," "Dollars," "US$," 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, 1997, 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, 1997, 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 2,110,234 acres of formerly barren land in Hainan that the PRC Government has converted to productive agricultural use since 1952, which includes the largest rubber production base in China, as well as rubber production facilities, timber production facilities, cultivation areas for tea and tropical crops, and other industries. References to "Hainan State Farms" are to the rubber farms in Hainan controlled by the Farming Bureau. References to "HARC" are to Hainan Zhongwei Agricultural Resources -2- Company Limited (formerly known as Hainan Agricultural Resources Company Limited), a Sino-foreign joint stock company organized in the PRC, whose capital is owned 56% by Billion Luck, 39% by the Farming Bureau and 5% by Guilinyang Farm. References to "Local Governments" are to governments in the PRC, including governments at all administrative levels below the Central Government, including provincial governments, governments of municipalities directly under the Central Government, municipal governments, county governments, and township governments. References to "MU" are to an area of approximately 667 square meters. References to "Operating Subsidiaries" are to the consolidated operations, assets and/or activities, as the context indicates, of First Supply, and Second Supply. References to the "PRC" or "China" include all territory claimed by or under the control of the Central Government, except Hong Kong, Macau, and Taiwan. References to "PRC Government" include the Central Government and Local Governments. References to "Provinces" include provinces, autonomous regions, and municipalities directly under the Central Government. References to "Restructuring Agreements" are to the Shareholders' Agreement on Business Restructuring among Billion Luck, the Farming Bureau and Guilinyang Farm, and the Assets and Staff Transfer Agreement among HARC, First Supply, Second Supply and the Farming Bureau, both of which were effective as of October 1, 1996. References to "Second Supply" are to Second Goods And Materials Supply And Sales Corporation, a company organized in the PRC and a wholly-owned subsidiary of HARC. References to "Series A Preferred Stock" are to the Company's Series A Preferred Stock, $1.00 par value, of which no shares are outstanding. References to "Series B Convertible Preferred Stock" are to the Company's formerly designated series B convertible preferred stock, $.001 par value, of which no shares are outstanding and which is no longer so designated. References to "Series B Preferred Stock" are to the Company's Series B Preferred Stock, $.001 par value, of which 3,200,000 shares are outstanding. References to the "State Plan" refer to the plans devised and implemented by the PRC Government in relation to the economic and social development of the PRC. References to "Tons" are to metric tons. Forward-Looking Statements This report contains statements that constitute forward-looking statements. Those statements appear in a number of places in this report and include, without limitation, statements regarding the intent, belief and current expectations of the Company, its directors or its officers with respect to (i) the effect of the restructuring of HARC and the Operating Subsidiaries; (ii) the Company's ability to hedge against the risks associated with natural rubber prices by trading in natural rubber commodities futures; (iii) the Company's policies regarding investments, dispositions, financings, conflicts of interest and other matters; and (iv) trends affecting the Company's financial condition or results of operations. Any such forward-looking statement is not a guarantee of future performance 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 -3- 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- 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 approved to be changed from "Hainan Agricultural Resources Company Limited" to "Hainan Zhongwei Agricultural Resources Company Limited." A new business license, valid until June 28, 2000, and dated March 26, 1997, effecting the new name was obtained from the Hainan Provincial Industrial and Commercial Administration Bureau. HARC is a Chinese company incorporated on June 28, 1994, with a registered capital of Rmb100 million (US$12.08 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. 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 1996, according to data published in China Statistical Yearbook 1997 and Statistical Yearbook of Hainan 1997, Hainan Province accounted for approximately 56% of the domestic production of natural rubber in the PRC, of which approximately 80% of that 56% is from the Hainan State Farms and approximately 20% is from non-state farms. Accordingly, the Hainan State Farms control 45% of the PRC's domestic output of natural rubber. The Operating Subsidiaries market and distribute the rubber to customers throughout the PRC, such as tire manufacturers, rubber processing plants, and import and export companies. These customers include state-owned and non-state-owned enterprises. Because of the price risk associated with certain firm commitments for the purchase of natural rubber, the Company, through HARC and the Operating Subsidiaries, enters into natural rubber commodities futures contracts to hedge the risk. As opportunities arise, HARC and the Operating Subsidiaries also have a team of futures experts to manage and enter into natural rubber commodities futures contracts that are not specific hedges, in anticipation of a rise or fall in the price of natural rubber, based on their knowledge of the supply and demand situation with respect to natural rubber in the PRC. In addition, the Operating Subsidiaries procure, for the Farming Bureau, the Hainan State Farms and other affiliated customers, many types of production materials, such as automobiles, farm equipment, fuel, and chemicals, as well as for other customers unaffiliated with the Farming Bureau. First Supply and Second Supply were originally established as state-owned enterprises in the PRC by the Farming Bureau. -5- The following chart illustrates the equity ownership by percentage of each of the Company's subsidiaries as of December 31, 1997:
-------------------------------- CHINA RESOURCES DEVELOPMENT, INC., a Nevada corporation -------------------------------- | | 100% -------------------------------- BILLION LUCK COMPANY LTD., a British Virgin Islands company -------------------------------- | | - ----------------------------- | ---------------------------- GUILINYANG FARM, 5% | 39% FARMING BUREAU, a PRC entity controlled by | a division of the PRC the Farming Bureau | Ministry of Agriculture - ----------------------------- | ---------------------------- 56% | -------------------------------- HAINAN ZHONGWEI AGRICULT- 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") ------------------------ ------------------------
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 thirteen trading and servicing divisions. During the fourth quarter of 1996, HARC undertook a restructuring plan in order to rationalize and streamline its business operations and assets. The terms of the restructuring are set forth in a Shareholders' Agreement on Business Restructuring among the Farming Bureau, Guilinyang Farm and Billion Luck, and an Assets and Staff Transfer Agreement among the Farming Bureau, HARC, First Supply and Second Supply, both of which were effective on October 1, 1996, and are included as exhibits hereto and incorporated herein by reference. The purpose of the restructuring plan is to control management overhead and improve efficiency in order to enhance long-term benefits to the Company. The plan 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 and servicing divisions of the Operating Subsidiaries have now been reduced to only a few principal trading and servicing divisions. Cash management and policy making 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 or servicing division is a profit center or cost center and has its own accounting function. Every quarter, each division submits its financial statements to First Supply or Second Supply for consolidation. Those companies, in turn, submit the combined accounts to HARC for consolidation. The General Manager of each division accounts for its results to the General Manager of First Supply or Second Supply, who, in turn, accounts for the overall results to the board of directors of HARC. HARC has a two-tier structure with a board of directors and a supervisory board. The board of directors is responsible for the day-to-day management of and all major decisions relating to HARC (except decisions that may be made by HARC's shareholders during a general meeting of the shareholders) -6- and, as of December 31, 1997, was made up of 11 members, of which five were nominated by the Farming Bureau and six were nominated by Billion Luck. The Chairman of HARC was nominated by the Farming Bureau, and the Vice-Chairman was nominated by Billion Luck. The General Managers of First Supply and Second Supply are also members of the board of directors of HARC. The General Manager and the Chief Finance Officer of HARC are also members of the board. The General Manager of HARC was nominated by the Farming Bureau, and the Chief Finance Officer was nominated by Billion Luck. The supervisory board is responsible for supervising the board of directors and the senior management of HARC in order to prevent the abuse of rights and infringement of the interests of HARC and its shareholders and employees. Among other responsibilities, members of the supervisory board attend meetings of the board of directors and observe HARC's managers to ensure that their acts do not contravene any laws or regulations or HARC's articles of association or the resolutions of HARC's shareholders in meetings thereof. As of December 31, 1997, the supervisory board was made up of five members, two of which were nominated by Billion Luck and three of which were nominated by the Farming Bureau. Two of the three members nominated by the Farming Bureau were elected by the workers of HARC. The following chart illustrates the organizational and management structure of HARC:
---------------------------- ---------------------------- BOARD OF SUPERVISORY DIRECTORS ------------------ COMMITTEE ---------------------------- ---------------------------- | | ---------------------------- GENERAL MANAGER ---------------------------- | | | ------------- -------------- -------------- ------------- -------------- ------------- | | | - ----------------------------- ---------------------------- ---------------------------- DEPUTY DEPUTY DEPUTY GENERAL MANAGER GENERAL MANAGER GENERAL MANAGER - ----------------------------- ---------------------------- ---------------------------- | | | | | | | | | | | | - ----------------------------- ---------------------------- ---------------------------- FIRST SECOND HEADQUARTERS SUPPLY (1) SUPPLY (2) (3) - ----------------------------- ---------------------------- ----------------------------
- ---------- (1) The principal businesses in which First Supply's divisions engage include: Natural Rubber, Fuels & Chemicals, Farm Equipment & Machinery, Futures Trading, Fertilizers, Automobile Trading, Transport & Delivery. (2) The principal businesses in which Second Supply's divisions engage include: Natural Rubber, Fuels & Chemicals, Automobiles & Machinery, Futures Trading, Farm Equipment, Transport & Delivery. (3) The principal businesses in which the HARC headquarters engages include: Investment Holding, Trading of Agricultural Products and Futures Trading. Activities of HARC and the Operating Subsidiaries The Operating Subsidiaries function as affiliated trading partners of the Farming Bureau and the Hainan State Farms. They purchase raw natural rubber (both dried and latex) from the Hainan State Farms and resell the raw natural rubber to customers throughout the PRC. In 1997, 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, 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 commodities futures to hedge the price risk associated with certain firm commitments for the purchase of natural rubber. HARC and the Operating Subsidiaries also enter into natural rubber commodities futures contracts which are not specific hedges. See Financial Statements and Notes included therein attached as Appendix A hereto. In fulfilling their role as trading partners of the Farming Bureau, the -7- Operating Subsidiaries serve as a sales outlet for the raw natural rubber produced by the Hainan State Farms and procure production materials for the Farming Bureau and the Hainan State Farms. Before 1994, the Farming Bureau generally established the selling price of natural rubber in order to allow the Operating Subsidiaries to earn a pre-determined profit margin. Commencing in 1994, however, the Farming Bureau generally ceased establishing the selling price of natural rubber, and instead allowed the Operating Subsidiaries to determine the selling price according to market conditions, subject to a minimum gross profit margin of 3.5% to be earned by the Operating Subsidiaries on natural rubber purchased from the Hainan State Farms as set forth in the Sale and Purchase Agreement (as defined hereinbelow). With respect to the procurement of materials and supplies, the Operating Subsidiaries generally do not maintain significant levels of inventory, but instead locate suppliers and the necessary products upon the receipt of orders. Management of the Operating Subsidiaries has determined that this policy reduces holding costs and minimizes exposure to price fluctuations. However, in anticipating favorable market conditions or with respect to certain common items, the Operating Subsidiaries may maintain inventory levels in these limited circumstances sufficient to satisfy estimated demand for one to three months. With respect to the distribution of natural rubber, due to the seasonal nature of rubber production, the Operating Subsidiaries stockpile a certain amount of rubber inventory during the peak production season for sales in those periods with no rubber output (usually the first quarter of each year). Pursuant to a Long-Term Sale and Purchase Agreement dated November 5, 1994 (the "Sale and Purchase Agreement"), among the Farming Bureau, HARC and the Operating Subsidiaries, the Farming Bureau agreed to direct the Hainan State Farms to sell to HARC and the Operating Subsidiaries on a priority basis, and HARC and the Operating Subsidiaries have agreed to purchase from the Hainan State Farms raw natural rubber for sale under the same terms and conditions as are offered to other purchasers. If HARC or the Operating Subsidiaries are offered the same quantity and same price for natural rubber from a Hainan State Farm and a non-state farm, HARC or the Operating Subsidiaries, as the case may be, must purchase from the Hainan State Farm. If the price offered by the Hainan State Farm is higher than that from a non-state farm, HARC or the Operating Subsidiaries, as the case may be, may purchase from the non-state farm. Otherwise, there is no condition requiring the purchase of any particular quantity of raw natural rubber from the Hainan State Farms. The Sale and Purchase Agreement has a term of 15 years and, subject to applicable law, may not be terminated except upon the agreement of the parties. INDUSTRY SEGMENTS The Operating Subsidiaries are principally engaged in the distribution of natural rubber and the procurement of materials and supplies in the PRC. In conformity with Item 101(b) of Regulation S-K, the following table sets forth the audited historical financial information related to Industry Segments (amounts in thousands):
Year Ended December 31, - ------------------------------------------------------------------------------------------------------------------------------------ 1995 1996 1997 1997 (Rmb) (Rmb) (Rmb) (US$) --------- --------- --------- --------- Net sales to unaffiliated customers: Distribution of natural rubber 1,776,641 1,519,060 858,211 103,649 Procurement of materials, supplies and distribution of other agricultural products 72,880 102,745 12,909 1,559 --------- --------- --------- --------- Total net sales to unaffiliated customers 1,849,521 1,621,805 871,120 105,208 --------- --------- --------- --------- Net sales to affiliated customers: Distribution of natural rubber 1,630 -- 245,934 29,702 Procurement of materials, supplies and distribution of other agricultural products 106,092 205,694 32,117 3,879 --------- --------- --------- --------- Total net sales to affiliated customers 107,722 205,694 278,051 33,581 --------- --------- --------- --------- Total net sales 1,957,243 1,827,499 1,149,171 138,789 ========= ========= ========= ========= Operating income: Distribution of natural rubber 47,188 40,460 17,672 2,134 Procurement of materials & supplies and distribution of other agricultural products 1,607 57,682 4,164 503 --------- --------- --------- --------- Total operating income 48,795 98,142 21,836 2,637 ========= ========= ========= ========= Identifiable assets: Distribution of natural rubber 423,701 542,005 203,015 24,519 Procurement of materials & supplies and distribution of other agricultural products 231,748 151,458 87,916 10,618 --------- --------- --------- --------- Total identifiable assets 655,449 693,463 290,931 35,137 Investments 11,963 10,601 145,928 17,624 Goodwill 1,076 1,049 1,021 123 --------- --------- --------- --------- Total assets 668,488 705,113 437,880 52,884 ========= ========= ========= =========
-8- GENERAL The main business of the Operating Subsidiaries is the purchase and sale of natural rubber produced in Hainan. The Operating Subsidiaries are the primary distributors of the natural rubber produced by the Hainan State Farms, which constitute the largest natural rubber production base in China. Hainan State Farms' natural rubber output was approximately 182,000 tons in 1996 (a sales value of approximately Rmb2.4 billion (US$289 million) for 1996). According to the Farming Bureau's Ninth Five-Year Plan (1995-2000), it is anticipated that the aggregate rubber output of the Hainan State Farms for the years 1995 to 2000 will be 1,100,000 tons, and that by the year 2000 the annual rubber output will reach 230,000 tons, with a sales value of approximately Rmb2.2 billion (US$266 million) at the 1997 average price level. It is also anticipated that by the year 2010, the annual rubber output of the Hainan State Farms will reach 250,000 tons, with a sales value of approximately Rmb2.4 billion (US$290 million) at the 1997 average price level. In addition, 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 30% 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 -9- 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 and related products, although they are provided through free market sales, the Operating Subsidiaries are guaranteed a minimum gross profit margin of 3.5% (before purchase discount 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 HARC or the Operating Subsidiaries the shortfall. The combined net income before taxes, minority interests and reorganization expenses of HARC and the Operating Subsidiaries was Rmb48.6 million (US$5.9 million) in 1995, Rmb92.4 million (US$11.2 million) in 1996 and Rmb65.6 million (US$7.9 million) in 1997. RUBBER DISTRIBUTION The Company, through HARC and the Operating Subsidiaries, engages in the marketing and distribution of natural rubber and its complementary products and materials produced by the Hainan State Farms. Natural rubber occupies a position of strategic importance in the PRC, comparable to the iron, steel, coal, and oil industries. Industrial rubber consists of synthetic rubber and natural rubber, which have similar uses but different characteristics, so the two are not completely interchangeable. Both types of rubber can be used for making tires, but heavy duty tires, such as for planes and for some motor vehicles, must be made of natural rubber. Natural rubber can only be planted in limited geographical areas in the world. Today, most of the rubber plantations in the world are in Southeast and Southern Asia, which in 1995 accounted for over 90% of the world's natural rubber output. According to China Statistical Yearbook 1997, China ranks 5th in the world in terms of natural rubber output. China's output accounted for 6.10%, 6.70% and 7.43% of the world's natural rubber output in 1993, 1994 and 1995, respectively. With its geographical location and humid tropical climate, Hainan province is the most suitable area for planting rubber trees in China, and Hainan has become the single most important production base of natural rubber in China, according to Statistical Yearbook of Hainan 1997. World Output of Natural Rubber by Country in 1995 ------------------------------------------------- Country or Region Tons - ----------------- (in thousands) Thailand 1,721 Indonesia 1,312 Malaysia 1,074 India 485 China 424 Philippines 178 Nigeria 105 Sri Lanka 105 Ivory Coast 97 Vietnam 84 Others 123 ----- TOTAL 5,708 ===== - ---------- (Source: China Statistical Yearbook 1997) Since January 1, 1952, the Farming Bureau, which controls approximately one quarter of the land area in Hainan, has developed the largest natural rubber production base in China with plantations covering approximately 3.6 million MU (approximately 620,470 acres or 968 square miles) in 1996, according to the Statistical Yearbook of Hainan 1997. The natural rubber output of the Farming Bureau and the Hainan State Farms was approximately 182,000 tons in 1996, accounting for approximately 45% of the total domestic output in China in 1996. According to the Farming Bureau's expansion plans and production capacity, it is anticipated that the aggregate natural rubber produced by the Hainan State Farms in the years 1995 to 2000 will -10- be 1,100,000 tons, and that annual rubber output will reach 230,000 tons in the year 2000 and 250,000 tons in the year 2010. The Operating Subsidiaries function as affiliated trading partners of the Farming Bureau and the Hainan State Farms. They purchase raw natural rubber (both dried and latex) from the Hainan State Farms and resell the raw natural rubber to customers throughout the PRC. As described above, before 1994, the Farming Bureau generally established the selling price of natural rubber, based upon the then existing market conditions, in order to allow the Operating Subsidiaries to earn a pre-determined gross profit margin. Commencing in 1994, however, the Farming Bureau generally ceased establishing the selling price of natural rubber, and instead allowed the Operating Subsidiaries to determine the selling price according to market conditions, subject to a minimum gross profit margin of 3.5%. The natural rubber market in 1997 remained sluggish and became worse in the second half year due to the currency crisis in Southeast Asia. The average unit price of Chinese domestic natural rubber was approximately Rmb12,700 (US$1,534) per ton and Rmb9,600 (US$1,159) per ton in 1996 and 1997, 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 the major rubber producing countries (such as Thailand, Indonesia and Malaysia). In 1997, due to continuous weakening of rubber consumption, especially in Japan and Korea, increasing supply from certain major rubber producers in Asia and large amount of natural rubber inventory accumulated in 1996, the rubber price in the international market dropped significantly. Since the second half year of 1997, the currency crisis in Southeast Asia caused the Asian currencies to deflate against US dollars, while the Renminbi yuan remained relatively stable against US dollars. 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 approximately 40% during 1997. 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 in 1997. Major Asian rubber exporting countries, such as Thailand and Indonesia, have targeted China (the world's second largest consumer of rubber) for the sale of their natural rubber. These exporting countries have offered China many preferential policies to stimulate export sales of natural rubber, including longer credit terms, sales discounts and delivery in advance of payment. China imported approximately 550,000 tons and 450,000 tons of natural rubber in 1996 and 1997, respectively. This large influx of natural rubber, coupled with the weak domestic rubber consuming market in China, has caused the domestic rubber price in 1997 to drop from approximately Rmb12,000 (US$1,449) per ton at the beginning of the year to Rmb7,400 (US$894) per ton by the end of the year. The Company's gross profit margin on the distribution of natural rubber has not been seriously affected by the fluctuation of the domestic rubber price because (i) the Company has entered into rubber futures contracts to hedge against the risk of adverse price movement of natural rubber; (ii) under the Long-Term Supply and Purchase Agreement between the Operating Subsidiaries and the Farming Bureau, a minimum gross profit 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. 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 Rmb1,653 million (US$200 million) in 1995, Rmb1,438 million (US$174 million) in 1996 and Rmb1,012 million (US$122 million) in 1997. The single largest supplier within the Hainan State Farms accounted for approximately 3% (Rmb57 million, US$6.9 million) in 1995, 3% (RMB44.4 million, US$5.4 million) in 1996 and 4% (Rmb42.2 million, US$5.1 million) in 1997. No single farm accounted for more than 5% of the total purchases of natural rubber in any of the years 1995, 1996 or 1997, but all supplier farms are controlled under PRC law by the Farming Bureau. The top five supplier farms accounted for approximately 13% (Rmb223 million, US$26.9 million) in 1995, 12% (Rmb168 million, US$20.3 million) in 1996 and 18.5% (Rmb187 million, US$22.6 million) in 1997. 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. -11- 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. Marketing The Hainan State Farms are the dominant suppliers of raw natural rubber and natural rubber products in China. In 1996, they accounted for approximately 45% 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 10 persons in the natural rubber business. The Operating Subsidiaries' sales and marketing personnel make regular visits to customers and to the Hainan State Farms to maintain contacts and monitor requirements. Currently, all sales and distribution of raw natural rubber and natural rubber products occur within the PRC. The business operations of HARC and the Operating Subsidiaries are conducted solely within the PRC; consequently, the Company is solely dependent upon trade in the PRC. The Company does not currently engage in any export trade from the PRC. Customers Net sales of natural rubber for 1995, 1996 and 1997 were Rmb1,778 million (US$215 million), Rmb1,519 million (US$183 million) and Rmb1,104 million (US$133 million), respectively. The five largest customers for rubber, in the aggregate, accounted for approximately 19%, 27% and 37% of the total revenue derived from rubber sales for 1995, 1996 and 1997, respectively. The single largest customer accounted for approximately 7%, 11% and 22% of such revenue for 1995, 1996 and 1997, respectively. For the year ended December 31, 1997, HARC and the Operating Subsidiaries had a total of approximately 480 customers for natural rubber and natural rubber products with only one customer accounting for more than 5% of total sales of such products. This customer was Jin Long Corporation, an entity controlled by the Farming Bureau, which accounted for 22% of total sales of natural rubber in 1997. No other single customer accounted for more than 5% of total sales of natural rubber in 1997. Seasonality The geographic and climatic conditions in Hainan are such that natural rubber production has high and low seasons. Generally, there is no rubber harvest from January to March. The high season commences in April. Sales of natural rubber and natural rubber products generally grow in the second quarter and reach the peak in the third and fourth quarters due primarily to the increased production of natural rubber. All sales in the first quarter of a year relate to inventory maintained from the inventory of the prior year. The high season ends in November. Sales in the last two quarters accounted for 71%, 61% and 59% of the total sales for 1995, 1996 and 1997, respectively. Distribution 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 22,669 square meters, 66 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. The Operating -12- Subsidiaries also transport rubber from the Hainan State Farms to the port of Zhangjiang, PRC, which operates as a distribution center from where the natural rubber is delivered to customers by rail to destinations within the PRC. Some of the natural rubber is also delivered locally in Hainan. Working Capital Items The Operating Subsidiaries generally grant their purchasers the right to return substandard natural rubber, as determined by laboratories recognized by both parties. Sales returns or losses borne by the Operating Subsidiaries are reimbursed by the farm that supplied the substandard rubber. These sales returns could potentially impact the working capital levels of the Operating Subsidiaries if such returns were significant; however, in the past such sales returns have been insignificant. Prior to 1994, sales of rubber were made principally on an open account basis payable within 30 days. Starting in 1994, because of increased rubber demand, a significant portion of such sales are made on a "cash on delivery" basis. The Operating Subsidiaries have been working to recover aged accounts receivable while establishing policies to tighten credit control. Some of these policies require new customers to place deposits of 5% of the invoiced value of a purchase upon signing a sales contract or require full payment on or before delivery for small new customers. In addition, no sales are made to those customers with long outstanding balances with the Operating Subsidiaries until past due accounts receivable are settled. Following the tightening of the credit control policy, customers are now required to pay the balance of the invoiced value (after deducting the 5% deposit paid) on delivery. However, in order to maintain good customer relationships, extended payment terms of no more than one month may be granted to certain customers based on their credit and payment history with the Operating Subsidiaries. Due to the seasonal nature of rubber production, the Operating Subsidiaries stockpile a certain amount of rubber inventory during the peak production season for sales in those periods with no rubber output. Prior to July, 1992, the Farming Bureau was responsible for financing the Hainan State Farms during the winter months when there was no rubber production. In July, 1992, the Operating Subsidiaries began providing financing to the Hainan State Farms (primarily for working capital and to purchase materials and supplies). Accordingly, the Operating Subsidiaries obtained short term bank loans, which were generally secured by guarantees of the Farming Bureau, to provide such financing. When a rubber purchase was made by an Operating Subsidiary from a farm which had an outstanding balance in favor of HARC or the Operating Subsidiary from a prior financing advance, it was customary practice to credit the purchase price of the rubber against the balance on the financing account of such farm. Neither HARC nor the Operating Subsidiaries are obligated to provide any future financing advances to any Hainan State Farms. Pursuant to the 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 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. Competitors There are several companies competing for business in the domestic -13- 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 Farming Bureau. There are also certain small, non-state owned rubber producers located in the provinces of Hainan, Guangdong, Yunnan, Guangxi, and Fujian. However, the quantities produced by these non-state owned farms and individuals are relatively insignificant. China Output of Natural Rubber by Region in 1996 ------------------------------------------------ Region Tons - ------ ---- Hainan 225,793 Yunnan 146,938 Guangdong 26,302 Guangxi 3,017 Fujian 400 ------- TOTAL 402,450 ======= (Source: China Statistical Yearbook 1997) According to the China Statistical Yearbook 1997, the rubber output from Hainan Province was 225,793 tons in 1996. According to the Statistical Yearbook of Hainan 1997, the rubber output from the Hainan State Farms was 181,598 tons in 1996. Consequently, the rubber output from non-state owned enterprises in Hainan Province accounted for approximately 44,195 tons, representing 20% of the total natural rubber output of Hainan Province in 1996. 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 1997 and statistics provided by the China Tropical Agriculture Institute, in 1996, the domestic rubber output and rubber consumption were 402,000 tons and 770,000 tons, respectively. Accordingly, the rubber output of the Farming Bureau in 1996 accounted for approximately 45% of the total domestic output of natural rubber and satisfied approximately 24% of the domestic consumption. However, due to the influx of imported natural rubber of approximately 550,000 tons in 1996, the overall supply of natural rubber well exceeded demand, which caused a large backlog of rubber inventory in 1996. Since the second half 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. The management believes that the competition from imported rubber, together with the weak consumption market, became more severe in 1997 and will also affect the Company's performance in the foreseeable future. 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 the capital expenditures, including capital expenditures required in order to comply with environmental laws and regulations, in the rubber distribution segment of the business of the Operating Subsidiaries 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 -14- for the Hainan State Farms. The percentage of such sales to non-affiliates, which has become less significant in recent years, was 41% in 1995, 33% in 1996 and 29% in 1997. The decrease of such sales to non-affiliates from 1995 through 1997 was due to the reduction of scope of procurement of certain materials and supplies, such as building and construction materials, iron and metals, and automobiles, as a result of the slow down of property and automobile markets (such customers are non-affiliates) due to the PRC Government's austerity measures to combat the overheated economy. Sales of fertilizers, pesticides, etc., which are mainly sold to farms (affiliates) remained strong. Therefore, there were fewer sales to non-affiliates. The sourcing and procurement activities generally commence upon the receipt by an Operating Subsidiary of an order to obtain certain of the various materials set forth above. Upon such receipt, the Operating Subsidiary identifies potential suppliers for the required production materials and obtains quotations from the various suppliers. In order to obtain the most favorable terms, the Operating Subsidiary will negotiate with many different suppliers, with pricing and quality being the main points of negotiation. The Operating Subsidiaries generally do not maintain significant levels of inventory, but instead locate suppliers and the necessary products upon the receipt of orders. Management of the Operating Subsidiaries has determined that this policy reduces holding costs and minimizes exposure to price fluctuations. However, in anticipating favorable market conditions or with respect to certain common items, the Operating Subsidiaries may maintain inventory levels sufficient to satisfy estimated demand for one to three months. Pursuant to the Sale and Purchase Agreement, the Farming Bureau agreed to direct the Hainan State Farms to purchase all of their requirements of production materials and other commodities offered by the Operating Subsidiaries and HARC under the same terms and conditions as are offered by other suppliers. In the case of production material and other commodities, a Hainan State Farm requests a price quote for a specified quantity of a particular item from HARC or the Operating Subsidiaries. Upon receiving the price quote, the Hainan State Farm can obtain quotes from other suppliers based on the same quantity of the requested item. The Hainan State Farm must inform HARC or the Operating Subsidiaries, as the case may be, of the amounts of the other quotes and, if any of the quotes are lower, HARC or the Operating Subsidiaries have the right to lower their quote to the level of the competing quote. In the event that the Operating Subsidiaries are unable to profitably match the terms offered to the Hainan State Farms by sources other than the Operating Subsidiaries, the Operating Subsidiaries will be required to sell to the Hainan State Farms at a loss or forebear from making such sales. If HARC or an Operating Subsidiary matches the competing quote based upon the same quantity of the item requested, the Hainan State Farm must purchase the item from HARC or the applicable Operating Subsidiary. Otherwise, the Hainan State Farm can purchase the item from the competing supplier. The Sale and Purchase Agreement has a term of 15 years and, subject to applicable law, may not be terminated except upon the agreement of the parties. The Sale and Purchase Agreement will expire on November 5, 2009. Suppliers During 1997, HARC and the Operating Subsidiaries purchased production materials and supplies from a total of approximately 45 suppliers. The value of the total purchases of production materials and supplies was approximately Rmb135 million (US$16.3 million) in 1995, Rmb251 million (US$30.3 million) in 1996 and Rmb37 million (US$4.5 million) in 1997. The single largest supplier accounted for approximately 11% (Rmb15 million, US$1.8 million) in 1995, 16% (Rmb39 million, US$4.7 million) in 1996 and 34% (Rmb13 million, US$1.4 million) in 1997. The three largest suppliers accounted for 11%, 7% and 6%, respectively, of such purchases in 1995, the four largest suppliers accounted for 16%, 12%, 6% and 6%, respectively, of such purchases in 1996 and the five largest suppliers accounted for 34%, 9%, 7%, 7% and 7%, respectively, of such purchases in 1997 (and no other suppliers accounted for more than 5%). The top five suppliers accounted for approximately 26% (Rmb35 million, US$4.2 million) in 1995, 44% (Rmb111 million, US$13.4 million) in 1996 and 65% (Rmb24 million, US$2.9 million) in 1997. 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 -15- materials to the Farming Bureau and the 92 farms comprising the Hainan State Farms. The Operating Subsidiaries maintain a sales and marketing team of 33 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 1995, 1996 and 1997 totaled approximately Rmb179 million (US$21.6 million), Rmb308 million (US$37.2 million) and Rmb45 million (US$5.4 million), respectively. The five largest customers for production materials and supplies accounted for approximately 6%, 37% and 8% of the total revenue derived from sales of production materials and supplies for 1995, 1996 and 1997, respectively. The single largest customer accounted for less than 5% of such revenue for 1995. The two largest customers accounted for 12% and 9%, respectively, of such revenue in 1996 and the single largest customers accounted for less than 5%, of such revenue in 1997 (and no other customers accounted for 5% or more). HARC and the Operating Subsidiaries have a broad customer base and are not dependent upon any single customer for sales. However, aggregate sales to affiliates of the Farming Bureau accounted for 59%, 67% and 71% of the total revenue derived from sales of production materials and agricultural products for 1995, 1996 and 1997, respectively. Seasonality The seasonal fluctuations experienced by the Operating Subsidiaries in the production materials procurement segment are significantly less severe than those experienced in connection with the rubber production operations. However, to the extent that the Operating Subsidiaries may buy goods and materials related to the rubber industry from suppliers, but sell such goods and materials on credit to Hainan State Farms, repayment may be affected by the seasonality of rubber production. Working Capital Items Sales by HARC and the Operating Subsidiaries are principally made in Renminbi. The Operating Subsidiaries have been working to recover aged accounts receivable while establishing policies to tighten credit control. In the past, most of the sales were made on an open account basis payable within 30 days. The new policies require "cash on delivery" terms for small or new customers. In addition, no sales are made to those customers with long outstanding balances with the Operating Subsidiaries until past due accounts receivable are settled. However, in order to maintain good customer relationships, extended payment terms of one to two weeks may be granted to certain customers based on their credit and payment history with the Operating Subsidiaries. No extended payment terms are granted for more than one month. For sales to the Hainan State Farms, more flexible payment terms may be allowed depending on credit history and regularity of purchase orders. Such payment terms 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 competition 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 -16- 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 the Operating Subsidiaries: 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 The price and quality of products sold by the competitors are similar to that of the comparable products sold by the Operating Subsidiaries. However, the Operating Subsidiaries can usually arrange more prompt fulfillment of orders and shipment of goods due to their warehouse facilities and transportation fleet. Also, the Operating Subsidiaries can often offer more flexible payment terms than their competitors with respect to sales to the Hainan State Farms. Environmental Protection Due to the business nature of the Operating Subsidiaries in the procurement segment, management does not believe that there are any material requirements under PRC environmental law or regulations applicable to the Operating Subsidiaries which could have a material adverse effect on the capital expenditures, including capital expenditures required in order to comply with environmental laws and regulation, in the procurement segment of the business of the Operating Subsidiaries. PRC LEGAL SYSTEM The PRC is still in the process of developing a comprehensive system of laws. A significant number of laws and regulations dealing, in particular, with economic matters and foreign investment, protection of intellectual property, taxation, technology transfer and trade have been promulgated since 1978 when the PRC first embarked on its economic reform policy. The Constitution was amended in December 1982 to authorize foreign investment and to guarantee the "lawful rights and interests" of foreign investors in the PRC. National laws in the PRC are promulgated by the National People's Congress ("NPC"). However, when the NPC is not in session, its Standing Committee promulgates laws and the NPC acts as a rubber stamp. The State Council, certain of the entities affiliated with the State Council and people's congresses at the provincial and municipal levels are also vested with the power to promulgate administrative measures, rules and regulations having the force of law. The legal system in the PRC is based on written statutes, and decided cases do not constitute binding precedents, although such cases are sometimes referred to for guidance. The main legislation governing the judicial system is The Law of the People's Republic of China concerning the Organization of the Judicial System, which came into effect on July 1, 1979 and was amended on September 2, 1983. The main legislation governing civil procedure is The Law of the People's Republic of China on Civil Procedure (the "Civil Procedure Law") which came into effect on April 5, 1991. All foreign individuals, enterprises and other entities are given the same rights and obligations as PRC individuals, enterprises and other entities in instituting or defending proceedings in courts. If, however, the rights and -17- obligations of PRC individuals, enterprises or other entities to institute or defend legal proceedings are subject to any restriction in any foreign jurisdiction, then reciprocal restrictions may be imposed by PRC courts on the rights and obligations of the individuals, enterprises and other entities of such jurisdictions to institute or defend legal proceedings in the PRC. Foreign individuals, enterprises and other entities who wish to retain legal counsel in instituting or defending any proceedings in a PRC court must retain lawyers qualified in the PRC. All civil cases are decided by the court on the basis of a majority vote and are subject to a two-tier procedure, with cases being heard by a court of first instance and then subject to appeal to an appellate court. Courts in the PRC are divided into four levels: the Supreme People's Court, the High People's Court, the Intermediate People's Court and the Elementary People's Court. At each level, there is a criminal division, a civil division, an economic division and an administrative division. Cases involving foreigners are usually first brought at the intermediate level. The PRC also has specialty courts which handle maritime military, maritime, railroad, forestry and traffic matters. The Supreme People's Court is the highest judicial establishment in the PRC. It is responsible for supervising all other courts. It has appellate jurisdiction over High People's Courts and specialty courts, and original jurisdiction in limited circumstances. It also adjudicates certain special criminal prosecutions. In case of uncertainty in relation to the interpretation of any law, rule or regulation, the Supreme People's Court may be asked to provide an opinion on the interpretation of such law, rule or regulation. Most judges in the PRC are members of the Chinese Communist Party (the "CCP"), and the party expects judges to carry out its policies. In an attempt to promote judicial independence, a long-standing "examination and approval" system of review by the CCP, which was used in cases involving the death penalty, foreigners and certain important decisions, was officially abolished in 1979. However, review of decisions by the party is still common. If a legally binding judgment or ruling is given by a PRC court, but the party against whom such judgment or ruling is to be enforced is not present or does not have any assets in the PRC, the person seeking enforcement may apply to the appropriate foreign court for recognition and enforcement of such judgment or ruling. Alternatively, where there is an applicable judicial assistance treaty or other arrangement for reciprocal enforcement of judgments between the PRC and the country in which the PRC judgment or ruling is sought to be enforced, the PRC court may be asked to seek the enforcement of such judgment or ruling directly through the courts in such foreign country. Similarly, if a party requests a PRC court to recognize or enforce a judgment or ruling given by a foreign court, such judgment or ruling will be recognized and enforced only where there is an applicable judicial assistance treaty or other arrangement for reciprocal enforcement of judgements between the PRC and the country of the court by which such judgment or ruling is given. Where there is an applicable judicial assistance treaty, a foreign court may directly request a PRC court to recognize and enforce such a judgment. The enforcement of such judgment or ruling, however, must not violate the public security, state sovereignty or basic principles of the law of the PRC or contradict the public interest of the PRC. If it is necessary to enforce such judgment or ruling, the PRC court will issue an enforcement order and will proceed with enforcement in accordance with PRC law. To date, the PRC has concluded judicial assistance treaties with only a few countries, including Belgium, France, Poland, Mongolia, Ukraine, Romania, Spain, Italy, Russia, Cuba, Thailand, Egypt, Khazakstan, Belarus, Turkey, Greece and Bulgaria. Foreign arbitral awards may be enforced in the PRC in accordance with the Civil Procedure Law, which provides that an application for enforcement shall be submitted to the Intermediate Peoples Court of the place where the party against whom enforcement is sought is domiciled or where such party's property is located. Application for enforcement shall be handled pursuant to international treaties to which the PRC is a party, most importantly the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the "New York Convention"), to which the PRC acceded in 1987. As of September 20, 1993, 129 states and territories were members of the New York Convention, including the U.S. and Hong Kong, to which Great Britain extended application of the Convention pursuant to its own accession. There is no express requirement in the Civil procedure Law, as in the case of foreign court judgments and rulings, that foreign arbitral awards which are brought for enforcement in the PRC must not violate the public security, -18- state sovereignty or basic principles of the law of the PRC or contradict the public interest of the PRC. However, the New York Convention does permit a PRC court to refuse recognition and enforcement of a foreign arbitral course on the grounds that doing so would be contrary to the public policy of the PRC. Nonetheless, the Civil Procedure Law and the New York Convention allow PRC courts significantly less basis for rejecting an application or enforcement of a foreign arbitral award than exists in the case of foreign court judgments or rulings. A consistent record of enforcement of foreign arbitral awards, however, has yet to develop. The China International Economic and Trade Arbitration Commission ("CIETAC"), established in Beijing under the auspices of the China Council for the Promotion of International Trade, is one of two domestic arbitration organizations in the PRC charged with arbitrating foreign-related disputes. Under the new CIETAC arbitration rules, which came into effect on June 1, 1994, CIETAC has jurisdiction over any dispute arising from "international or external economic and trade transactions" with respect to which an arbitration agreement selecting CIETAC arbitration has been reached. The other arbitration organization exclusively arbitrates foreign-related maritime disputes. The CIETAC rules provide that an award rendered by a CIETAC tribunal shall be final and binding on the parties. The Civil Procedure Law also provides that a PRC court may only refuse to enforce a CIETAC final award in the event of procedural errors relating to the jurisdiction of CIETAC over a given dispute or the failure by an arbitration tribunal to abide by CIETAC rules, and may also deny execution of the award in the event that it determines that doing so would be against the "public interest". Although most arbitrations are conducted in Beijing, parties to a dispute may agree that the dispute be heard under the auspices of either of the two CIETAC sub-commissions established in Shenzhen and Shanghai. The parties may agree to appoint a single arbitrator to arbitrate a dispute, but normally three arbitrators form the arbitration panel. Each party selects one arbitrator and the chairman of CIETAC selects the third, who acts as chairman of the tribunal. Arbitrators must be selected from a panel of arbitrators maintained by CIETAC. The panel of arbitrators currently comprises 296 arbitrators, of which approximately one-third are either Hong Kong or foreign individuals. The CIETAC arbitration rules also describe grounds for challenging arbitrators. In deciding the substantive aspects of a dispute, the CIETAC arbitration tribunal must look to the governing law of the contract. PRC foreign economic contract law permits the parties to choose foreign or PRC law as the governing law in most cases. In the event that the parties have not chosen a governing law, PRC choice of law rules provide for the selection of the law which has the closest connection to the subject matter of the dispute. Also, on September 1, 1995, the Arbitration Law of the People's Republic of China became effective, allowing arbitration commissions to be established in major cities of the PRC and authorizing such commissions to arbitrate foreign-related disputes if the subject arbitration agreement submits such disputes to such commissions. The activities of HARC and the Operating Subsidiaries in China are by law subject, in some cases, to administrative review and approval by various national, provincial, and local agencies of the Chinese government. While China has promulgated an Administrative Procedure Law permitting redress to the courts with respect to certain administrative actions, this law appears to be largely untested in this context. Although the Company believes that the support of local, provincial, and national governmental entities benefits the Company's operations in connection with administrative reviews and receiving approvals, there can be no assurance that such approvals, when necessary or advisable, will be forthcoming. [Item 2] PROPERTIES The Company does not own any real property with respect to its operations. The headquarters of HARC, the warehouse and the other facilities of the Operating Subsidiaries are all located in Hainan Province in the PRC. HARC and the Operating Subsidiaries use warehouse and other facilities consisting of a total gross area of approximately 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 -19- Bureau. The sales and administrative offices of the Operating Subsidiaries were relocated to the headquarters of HARC. As is typical in the PRC, the PRC government owns all of the land on which the improvements are situated. The local PRC governmental authorities in Hainan Province granted land use rights with respect to such land for an indefinite term to two related companies owned and controlled by the Farming Bureau. The rights of HARC and the Operating Subsidiaries to use the land on which the warehouse and other facilities are situated are subject to the rights of those two companies. The Farming Bureau has also entered into a rental agreement with HARC with respect to the rental of a portion consisting of 532 square meters of a building located in Haikou City, PRC, in which HARC's corporate headquarters are located. Such rental agreement is for a period of 10 years at an annual rental of Rmb170,240 (US$20,560) 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 and to house the sales and administrative functions of First Supply and Second Supply. The term of the lease is for a period of eight years (through September 30, 2004), and it covers an area of approximately 314 square meters at an annual rental rate of Rmb72,000 (US$8,696). [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, 1997. [Item 4] SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On December 30, 1997, pursuant to proper notice, the Company held its annual meeting of shareholders. Several matters were submitted to a vote of the shareholders of the Company, and proxies were properly solicited from the holders of shares of the Company's common stock on December 12, 1997, 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 Tam Cheuk Ho (1,782,301 votes for, 1,450 votes withheld, 12,101 abstentions) and Wong Wah On (1,783,301 votes for, 450 votes withheld, 12,101 abstentions) to serve as directors in Class I; and 2. the ratification of the appointment of Ernst & Young as the Company's independent accountants for the fiscal year ending December 31, 1997 (1,784,351 votes for, 2,501 votes against, 9,000 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 -20- "CHRB." Prior to such date, the Company's Common Stock was traded in the over-the counter market on the OTC Bulletin Board (the "Bulletin Board") operated by the NASD under the symbol "CEVL." Until August 7, 1995, there was only a limited trading market for the Company's Common Stock. The following table sets forth the high and low bid prices for the Company's Common Stock as reported by The Nasdaq Stock Market for each fiscal quarter of 1996 and 1997, for that period during the fiscal quarter ended September 30, 1995, during which high and low bid quotations were reported and for the fiscal quarter ended December 31, 1995. The bid prices are inter-dealer prices, without retail markup, markdown or commission, and may not necessarily reflect actual transactions. All of the below quotations were obtained from the monthly statistical report provided to the Company by The Nasdaq Stock Market, and the quotations have been adjusted to give retroactive effect to the one-for-ten reverse stock split that was effective as of December 31, 1996:
Period High Bid Low Bid ------ -------- ------- 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 1996 Fiscal Year, quarter ended: March 31, 1996..................... $62.50 $18.75 June 30, 1996...................... 19.69 3.75 September 30, 1996................. 5.94 3.44 December 31, 1996.................. 4.69 2.50
On March 31, 1998, there were 224 holders of record of the Company's Common Stock. The Company has not paid any dividends with respect to its Common Stock and has no present plan to pay any dividends in the foreseeable future. The Company intends to retain its earnings to support the growth and expansion of its business. Any dividends paid in the future by the Company will be paid at the discretion of the Company's Board of Directors and will be dependent upon distributions, if any, made by the Operating Subsidiaries through HARC to the Company's wholly-owned subsidiary, Billion Luck. Applicable PRC law and HARC's Articles of Association (the "Articles") require that, before HARC, as a limited joint stock company, distributes profits to investors, it must (1) satisfy all taxes; (2) provide for all losses incurred in previous years; and (3) allocate a specified percentage of remaining profits to each of the following: a surplus reserve (in the amount of 10% of such remaining profits), a collective welfare fund (in the amount of 10% of such remaining profits), and an incentive fund (in an amount between 5% and 10% of such remaining profits). The Articles provide that the foregoing may be adjusted by the HARC'S board of directors based upon HARC's business performance and development needs, subject to the approval of HARC's shareholders. Distributions of profits by the Operating Subsidiaries to HARC, and by HARC to Billion Luck are required to be pro rata in proportion to such party's investment in such company. In addition to the foregoing, any future determination to pay a dividend to holders of shares of Common Stock will depend on the Company's results of operations, its financial condition and other factors deemed relevant by the Board of Directors. Since the acquisition of Billion Luck by the Company in December, 1994, the Company has not received any distributions from any of its subsidiaries and has not made any distributions to its shareholders. [Item 6] SELECTED FINANCIAL DATA The following table sets forth selected financial data of the Company and its subsidiaries. The selected consolidated financial data in the table for the Company's four fiscal years ended December 31, 1994, 1995, 1996 and 1997, are derived from the consolidated financial statements included elsewhere herein. The selected pro forma financial data in the table for the Company's fiscal years ended December 31, 1993 and 1994, are derived from the unaudited -21- pro forma consolidated financial information included elsewhere herein. The data should be read in conjunction with "Management's Discussion and Analysis of Results of Operations and Financial Condition," the Consolidated Financial Statements of the Company and related Notes thereto, the Combined Financial Statements of the Operating Subsidiaries, the unaudited pro forma consolidated financial information, and other financial information included elsewhere herein.
--------------------------------------------------------------------------------------------- In Thousands, Except Per Share Amounts Year Ended December 31, 1993 1994 1994 1995 1996 1997 1997 (Rmb) (Rmb) (Rmb) (Rmb) (Rmb) (Rmb) (U.S.$) ---------- ---------- ---------- ---------- ---------- ---------- ---------- (Unaudited (Unaudited (Audited (Audited (Audited (Audited (Audited Pro forma) Pro forma) Historical) Historical) Historical) Historical) Historical) ---------- ---------- ---------- ---------- ---------- ---------- ---------- Income Statement Data Sales 1,479,201 1,754,288 1,308,248 1,957,243 1,827,499 1,149,171 138,789 Sales tax (6,391) -- -- -- -- -- -- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net sales 1,472,810 1,754,288 1,308,248 1,957,243 1,827,499 1,149,171 138,789 Cost of sales (1,421,268) (1,263,309) (1,851,186) (1,677,056) (1,092,972) (132,001) ---------- ---------- ---------- ---------- ---------- ---------- ---------- Gross Profit 51,542 67,344 44,939 106,057 150,443 56,199 6,788 Depreciation of fixed ssets (1,410) (1,981) (1,129) (2,820) (1,813) (1,429) (173) Selling and administrative expenses (25,318) (39,403) (24,627) (54,442) (50,488) (32,934) (3,978) ---------- ---------- ---------- ---------- ---------- ---------- ---------- Operating income 24,814 25,960 19,183 48,795 98,142 21,836 2,637 Financial income/(expense), net (1,737) 9,613 2,568 (33,212) (19,870) 145 18 Reorganization expenses (3,029) -- (3,029) -- -- -- -- Other income, net 5,612 6,054 30,580 3,693 13,238 8,216 28,654 Income before income taxes 33,286 43,789 24,334 44,237 84,326 52,561 6,348 Income taxes (3,663) (13,991) (9,798) (1,183) (6,564) (6,909) ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net income before minority interests 27,839 37,225 20,671 37,328 70,335 42,763 5,165 Minority interests (10,389) (34,513) (24,563) (2,967) (16,341) (18,153) ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net income after minority interests 35,822 18,200 2,198 14,257 20,884 10,282 19,175 ========== ========== ========== ========== ========== ========== ========== Basic earnings per share* 10.14 3.05 0.37 11.88 17.40 8.57 15.98 ========== ========== ========== ========== ========== ========== ========== Diluted earnings per share* 10.02 3.04 0.37 11.88 17.40 8.57 15.49 ========== ========== ========== ========== ========== ========== ========== Other financial data Income before income taxes, minority interests, depreciation and amortization 86,139 54,018 6,524 34,696 45,770 25,463 47,057 ========== ========== ========== ========== ========== ========== ========== Balance sheet data Current assets 508,583 480,235 480,235 633,958 685,216 281,692 34,021 Working capital 2,227 65,808 68,709 143,986 301,474 217,927 26,320 Total assets 537,418 533,305 533,305 668,488 705,113 437,880 52,884 Current liabilities 506,356 414,427 411,526 489,972 383,742 63,765 7,701 Long-term liabilities -- 54,075 54,075 -- -- -- -- Minority interests 13,667 51,609 55,914 74,067 108,580 133,143 16,080 Total liabilities and minority interests 520,023 520,111 521,515 564,039 492,322 196,908 23,781 Shareholder's Equity 17,395 13,194 11,790 104,449 212,791 240,972 29,103
-22- * The earnings per share information for the periods presented represents primary earnings per share of the Company as if the reverse stock splits in 1994 and 1996 had been completed at the beginning of the respective periods. [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 whose only significant asset is a wholly-owned British Virgin Islands subsidiary, Billion Luck, which owns a 56% interest in HARC, a limited liability joint stock company organized in the PRC which, through the Operating Subsidiaries, markets and distributes natural rubber and rubber products produced by the Hainan State Farms and non-state farms in the PRC, sources building and production materials, chemicals, farm equipment and machinery, automobiles and other commodities for use primarily by the Hainan State Farms and other unaffiliated customers, and trades in natural rubber commodities futures contracts. Accordingly, the Company will derive its revenues from the distributions paid to the Company through Billion Luck by HARC resulting from distributions paid by the Operating Subsidiaries. HARC pays distributions to its shareholders in accordance with their percentage interests as follows: Billion Luck (56%), Guilinyang Farm (5%) and Farming Bureau (39%). The Statements under "Results of Operations" and "Liquidity and Capital Resources" relate to the operations and 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 PRC. HARC was established on June 28, 1994, to act as the holding company of the Operating Subsidiaries. The Operating Subsidiaries principally engage in the marketing and distribution of raw natural rubber produced by the Hainan State Farms and non-state farms, and in the trading of natural rubber commodities futures contracts to hedge the price risk associated with certain firm commitments for the purchase of natural rubber. As opportunities arise, the Operating Subsidiaries also enter into natural rubber commodities futures contracts that are not specific hedges, in anticipation of a rise or fall in the price of natural rubber, based on their knowledge of the supply and demand situation with respect to natural rubber in the PRC. They also procure certain production materials and supplies which include 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. Prior to 1994, selling prices of natural rubber were generally set by the Farming Bureau in order to control the gross profit margin earned by the Operating Subsidiaries. Commencing in 1994, however, the Farming Bureau generally ceased establishing the selling price of natural rubber, and instead allowed Operating Subsidiaries to determine the selling price according to market conditions, subject to a minimum gross profit margin of 3.5% on natural rubber purchased from the Hainan State Farms. Generally, materials and supplies are sold at a higher profit margin than that of natural rubber. The primary cost of operating the business is the materials cost of natural rubber and other materials and supplies, as well as selling and administrative expenses. Pursuant to the 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 -23- 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$35 million). According to the Restructuring Agreements, the Farming Bureau was responsible for the payment of interest incurred on the bank loans after September 30, 1996. Results of Operations The following table shows the selected audited consolidated income statement data of the Company and its subsidiaries for the three fiscal years ended December 31, 1995, 1996 and 1997. The data should be read in conjunction with the Consolidated Financial Statements of the Company and related Notes thereto and other financial information included elsewhere therein:
(In thousands) - --------------------------------------------------------------------------------------------------------- Year Ended December 31, 1995 1996 1997 1997 (Rmb) (Rmb) (Rmb) (U.S.$) - --------------------------------------------------------------------------------------------------------- (Audited (Audited (Audited (Audited Historical) Historical) Historical) Historical) Net sales: Distribution of natural rubber 1,778,271 1,519,060 1,104,145 133,351 Procurement of materials and supplies and distribution of other agricultural products 178,972 308,439 45,026 5,438 ---------- ---------- ---------- ---------- 1,957,243 1,827,499 1,149,171 138,789 Gross profit 106,057 150,443 56,199 6,787 Gross profit margin 5.4% 8.2% 4.9% 4.9% Income before income taxes 44,237 84,326 52,561 6,348 Income taxes (6,909) (13,991) (9,798) (1,183) ---------- ---------- ---------- ---------- Net income before minority interests 37,328 70,335 42,763 5,165 Minority interests (18,153) (34,513) (24,563) (2,967) ---------- ---------- ---------- ---------- Net income after minority interests 19,175 35,822 18,200 2,198 ========== ========== ========== ==========
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 or 37% to Rmb1,149 million, compared to Rmb1,827 million for the corresponding period in 1996. Net sales of natural rubber declined by Rmb415 million or 27.3% to Rmb1,104 million, compared to Rmb1,519 million for the corresponding period in 1996. Net sales revenue for the procurement of materials and supplies decreased significantly by Rmb263 million or 85.4% to Rmb45 million, compared to Rmb308 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 per ton in 1996 to approximately Rmb9,600 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 US dollars, including the largest natural rubber producing countries like Thailand, Indonesia and Malaysia, while the exchange rate of Renminbi against US dollars remained relatively stable in 1997. This currenciy deflation caused a significant decline -24- 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 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 or 62.6% to Rmb56 million in 1997 from Rmb150 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 or 35% to Rmb32.9 million in 1997 from Rmb50.5 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. Financial Expenses, Net The net financial expenses changed from a net expense of Rmb20 million in 1996 to a net income of Rmb145,000 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 or 405% to Rmb30.6 million in 1997 from Rmb6.1 million 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 was recorded for the year 1997, compared to a profit of only Rmb1.4 million for the year 1996. Year Ended December 31, 1996 Compared to Year Ended December 31, 1995 Sales and Gross Profit Total net sales for the year ended December 31, 1996, decreased slightly by Rmb130 million or 6.6% to Rmb1,827 million, compared to Rmb1,957 million for the corresponding period in 1995. Net sales of natural rubber declined by Rmb259 million or 14.6% to Rmb1,519 million, compared to Rmb1,778 million for the corresponding period in 1995. The decline in natural rubber sales has been partially offset by the increase in procurement of materials and supplies. Net sales revenue for the procurement of materials and supplies increased significantly by Rmb129 million or 72% to Rmb308 million, compared to Rmb179 million for the corresponding period in 1995. -25- The natural rubber market in 1996 was not as favorable as in 1995 because of a weakened domestic rubber consumption market and a decline in the domestic natural rubber price caused by the large influx of imported natural rubber. The quantity of natural rubber sales decreased by approximately 18,000 tons or 13% to 120,000 tons, compared to 138,000 tons for the corresponding period in 1995. The unit price of natural rubber decreased from approximately Rmb15,500 per ton at the beginning of 1996 to approximately Rmb11,200 per ton by the end of 1996. During the third quarter of the year, the Company deliberately stockpiled natural rubber in anticipation of an upward price movement during the fourth quarter, when output is generally lower. However, the domestic price of natural rubber continued to be low during the fourth quarter because of the large influx of imported rubber during the fourth quarter. Following the completion of the Company's private offshore placements on March 8 and July 8, 1996, portions of the net proceeds from the offerings were invested into HARC and the Operating Subsidiaries as working capital to expand the distribution operations. During the year, the Company has expanded into trading of other agricultural products, such as coffee beans which were in high demand in China as a result of the active trading of coffee commodity futures in China. During the year, a quantity of approximately 8,500 tons of coffee beans were sold and a net sales revenue of approximately Rmb241 million was recorded, which carried an average gross profit of approximately 33%. The corresponding sales revenue was recorded under the procurement of materials and supplies. If sales of these agricultural products were excluded, net sales revenue from procurement of materials and supplies would drop by approximately Rmb112 million or 62% to Rmb67 million in 1996 from Rmb179 million in 1995. The decline was mainly due to the prolonged enforcement of the macroeconomic austerity measures implemented by the Central Government since mid-1993 to rein in the overheated Chinese economy, which has hampered the domestic consumption and demand for materials and supplies. Gross profits increased by Rmb44 million or 42% to Rmb150 million in 1996 from Rmb106 million in 1995. The overall gross profit margin also increased from 5.4% in 1995 to 8.2% in 1996. The increase was primarily attributable to the high gross profit margin earned from the trading of agricultural products. The gross profit margin on natural rubber distribution was down to 4.2% in 1996 from 5.3% on 1995 due to competition from imported natural rubber. The Company has mitigated the effect of adverse price movement for domestic rubber on the gross profit margin by entering into rubber futures contracts to hedge against the price risk associated with the holding of rubber inventory, rubber purchase commitments and anticipation of rubber purchases. The purchase discounts received from the farms, as well as the 3.5% gross profit margin guarantee, also helped to shield the Company against the effect of the drop in natural rubber prices on gross profit margins. Selling and Administrative Expenses Selling and administrative expenses decreased by Rmb3.9 million or 7.2% to Rmb50.5 million in 1996 from Rmb54.4 million in 1995. Pursuant to the Restructuring Agreements effective on October 1, 1996, the Company strategically consolidated and rationalized its various trading divisions in order to streamline its business operations and improve cost control. The successful implementation of the corporate restructuring and cost control measures has resulted in reduced administrative overhead, staff costs and related expenses. This reduction of administrative overhead, staff costs and related welfare expenses more than offset the increased legal and professional fees associated with regulatory compliance and public relations costs incurred as a result of the Nasdaq listing status of the Company. Financial Expenses, Net The net financial expenses decreased by Rmb13.3 or 40% to Rmb19.9 million in 1996 from Rmb33.2 million in 1995. The decrease in net financial expenses was primarily attributable to the reduction in bank interest expenses commencing in the fourth quarter of 1996 following the execution of the Restructuring Agreements effective on October 1, 1996. According to the Restructuring Agreements, all outstanding bank loans of the Operating Subsidiaries were deemed assigned to the Farming Bureau, together with the assignment of certain accounts receivable from the farms and certain affiliates of the Farming Bureau. As a result, all bank interest incurred by the Operating Subsidiaries commencing October 1, 1996, was borne by the Farming Bureau. -26- Other Income, Net Other income decreased by Rmb22.6 million or 79% to Rmb6.1 million in 1996 from Rmb28.7 million in 1995. This significant reduction in other income was primarily due to the reduction in profit from the trading of commodity futures contracts for non-hedging purposes. A profit on the trading of commodity futures of Rmb10.6 million was recorded for the year 1995, compared to a profit of only Rmb1.4 million for the year 1996. In addition, a service fee of Rmb5 million was paid to the Farming Bureau in accordance with the Agreement on Service and Cooperation entered into between the Farming Bureau and HARC dated November 5, 1994. The agreement stipulates that the Farming Bureau is entitled to a service fee up to a maximum of Rmb5 million, calculated at a rate of 10% of HARC's annual net income before the service fee, as determined in accordance with U.S. GAAP, provided that the annual net income of HARC exceeds Rmb40 million after deducting such fee. No service fee was paid to the Farming Bureau in 1995 because the financial criteria for such payment was not met. 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 cash. Net cash provided by/(used in) operating activities was (Rmb119 million), Rmb130 million and (Rmb3 million) in fiscal 1995, 1996 and 1997, respectively. Net cash flows from the Operating Subsidiaries' operating activities are attributable to the Operating Subsidiaries' income and changes in operating assets and liabilities. The substantial increase in cash used in operating activities in 1995 was mainly due to the increase in purchase deposits paid to Hainan State Farms and to the increase in inventory held at the year end in anticipation of a higher selling price for natural rubber during the non-harvest season in early 1996. Effective from January 1, 1997, the Operating Subsidiaries were no longer require to pay deposits on purchases from Hainan State Farms. The Operating Subsidiaries do not have outstanding bank loans as at December 31, 1997. 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 1.8% per annum in 1995, 1996 and for the first eight months of 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. Impact of recently issued accounting standard In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"), to established new rules for the reporting and display of comprehensive income and its components. However, adoption of SFAS 130 in 1998 will have no impact on the Company's consolidated net income or shareholders' equity. -27- In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"), to establish standards for the way public business enterprises report information about operating segments. The Company has not completed the assessment of SFAS No. 131. However, it is anticipated that, at a minimum, operating segments would consist of the distribution of natural rubber and the procurement of materials, supplies and other agricultural products. SFAS 131 is effective for financial statements for fiscal year beginning after December 15, 1997 and will be adopted in 1998. Impact of year 2000 The Securities and Exchange Commission, in Staff Legal Bulletin No. 5 (CF/IM), has stated that public operating companies should consider whether they will be affected by any material expenditures, problems or uncertainties associated with the year 2000 issue, which affects many existing computer systems that use only two digits to identify a year in the date field. The Company believes that the matters raised by Staff Legal Bulletin No. 5 are not applicable in any material way to its own computer systems, and the Company intends to confirm that any computer systems that the Company may purchase or lease in the future will have addressed the year 2000 issue. The Company is currently determining the extent to which it may be impacted by third parties' failure to remedy their own year 2000 issues. The Company is having, and will continue to have, formal communications with all of its significant customers, payers, suppliers, and other third parties to determine the extent, if any, to which the Company's interface systems could be impacted by any third party year 2000 issues and related remedies. There can be no assurance that the systems of other companies with which the Company's systems interact will be timely converted and would not have an adverse effect on the Company's business. [Item 8] FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Company's Consolidated Financial Statements for the three fiscal years ended December 31, 1997, 1996 and 1995 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, 1998, and the ages of and positions with the Company held by each of such persons:
Age Position --- -------- Han Jian Zhun 49 Chairman of the Board of Directors Li Shunxing 47 Director and President Zhang Yibing 31 Vice Chairman of the Board of Directors Tam Cheuk Ho 35 Director and Chief Financial Officer Wong Wah On 34 Director, Secretary and Financial Controller Ching Lung Po 51 Director Wan Ying Lin 49 Director
-28- Mr. Han Jian Zhun has been a Director of the Company since December, 1994 and Chairman since December 30, 1997. He is also the President and General Manager of HARC. Mr. Han joined the Farming Bureau in 1968 and has consistently addressed agriculture production and management issues. Mr. Han joined the top management of the Farming Bureau in 1986 and became the Deputy Director in 1991. Mr. Han was also the General Manager of Ba Ye State Rubber Farm from 1990 through 1991. Mr. Han is heavily involved in industrial management of the 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. Zhang Yibing has been a Director since December, 1994 and Vice Chairman since December 30, 1997. He is also a Director of HARC. Mr. Zhang joined Bank of China Beijing Head Office in 1987, working in the Treasury and Asset Liability Sector. Mr. Zhang was assigned to Bank of China Sydney Branch in 1988 where he was in charge of foreign exchange and money market areas of the treasury. In March, 1991, Mr. Zhang was transferred to the Bank of China Beijing Head office where he was the Assistant Manager of Fixed Income Division until December, 1992, when he resigned from the Bank and joined China Everbright Holdings Co., Ltd. as Finance Manager. Mr. Zhang became the Corporate Finance Manager of China Everbright Financial Holdings Limited (formerly known as "Everbright Finance & Investment Co. Limited"), a wholly-owned subsidiary of China Everbright Holdings Co. Ltd. in October, 1993, and, in March, 1994, was appointed the Senior Manager of China Everbright Financial Holdings Limited, where he was in charge of investment and lending. In February, 1995, Mr. Zhang became a director of China Everbright Financial Holdings Limited. Mr. Zhang graduated from Beijing Foreign Languages Institute 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 -29- 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. Ching Lung Po has been a director of the Company since February 4, 1998. 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 in more than 20 years in the management of production and technology of 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 became 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. 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 Nasdaq 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 th China marketing and development division in Hong Kong. Then in January 1988 through February 1993, he worked as the marketing manager in Wai Tong Trading Company in Hong Kong. In 1993, he joined the Hong Kong Prestressing Concrete Engineering Company Limited, where he serves as manager. At the annual meeting of shareholders on December 30, 1997, Messrs. Tam Cheuk Ho and Wong Wah On were elected to serve as Class I Directors until the annual meeting to be held in 2000 and until their successors have been duly elected and qualified. Also, information regarding the resignations of former director and Chairman Yang Jiangang and former director and Vice Chairman Wang Faren, and the appointments of Ching Lung Po and Wan Ying Lin to fill the vacant director positions, is disclosed in the Company's Current Report on Form 8-K, dated December 29, 1997. Messrs. Han Jian Zhun and Ching Lung Po serve in Class II until the annual meeting to be held in 1998 and until their successors have been duly elected and qualified; and Messrs. Li Shunxing, Wan Ying Lin and Zhang Yibing 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, 1997 and the ages of and positions with the Company held by each of such persons: Name Age Position ---- --- -------- Li Fei Lie 31 Project Manager Mr. Li Fei Lie is the Project Manager of the Company. He is also vice president and a director of HARC, where he is responsible for accounting and financial control. In 1987, he obtained a Bachelor's degree in Economics from the Beijing University. In 1990, he obtained a Master's degree in Economics from the same university. From 1990 through April 1991, he was the Vice Chairman of the Beijing Agency of Guangxi Wuzhou Boiler Factory. From April, 1991 through October, 1992, he was the General Manager of the Development Department of Shenzhen Hong Wah Industrial and Commerce Company Ltd., a Sino-foreign limited liability joint stock company. In October, 1992, Mr. Li became Assistant to the General Manager of Hong Wah (Holdings) Limited and was responsible for the preparatory work relative to the incorporation of HARC. -30- [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$) (1) (US$) - --------------------------------------------------------------------------------=================------------------ Li Shunxing, President 1997 -0- -0- -0- -0- -0- 1996 -0- -0- -0- -0- -0- 1995 -0- -0- -0- -0- -0- Han Jian Zhun, Chairman of the 1997 1,548 -0- -0- 600 -0- Board of Directors, President of HARC 1996 1,548 -0- -0- 600 -0- 1995 645 -0- -0- 600 -0- Li Fei Lie, Project Manager, 1997 30,968 2,581 38,709 10,000 -0- Vice President of HARC 1996 30,968 2,581 38,709 -0- 10,000 1995 56,290 -0- -0- 10,000 -0- ============================================================================================================
(1) As of December 31, 1997, none of the stock options held by Mr. Han or Mr. Li were exercisable. None of such options was "in-the-money" at such date, as the fair market value (as defined in the Company stock option plan and adjusted as a result of the one-for-ten reverse stock split) of the common stock on December 31, 1997, was US$1.75 per share. The Company paid its Chief Executive Officer, Li Shunxing, no annual salary or bonus in 1995, 1996 and 1997. During the fiscal years ended December 31, 1995, 1996 and 1997, no director or executive officer of the Company or any of its subsidiaries was paid a total annual salary and bonus in excess of US$100,000. Han Jian Zhun, the Chairman of the Board of Directors and the president of HARC, was paid an annual salary and bonus of HK$5,000 (US$645) for the year ended December 31, 1995, HK$12,000 (US$1,548) for each of the two years ended December 31, 1996 and 1997. As of August 1, 1995, Billion Luck entered into an Employment Agreement with Mr. Han. In accordance with the terms of the Employment Agreement, Mr. Han has been employed by Billion Luck to perform such duties with respect to Billion Luck as Billion Luck's Board of Directors shall from time to time determine. Mr. Han shall receive a base salary of HK$12,000 (US$1,548) annually, which base salary shall be adjusted on each anniversary of the Employment Agreement to reflect a change in the applicable consumer price index or such greater amount as Billion Luck's Board of Directors may determine. The Employment Agreement has a term of three (3) years unless earlier terminated as provided therein. See "Certain Relationships and Related Transactions." Li Fie Lie, the Project Manager of the Company and the vice president and a director of HARC, was paid annual compensation of HK$436,250 (US$56,290) for the year ended December 31, 1995, HK$560,000 (US$72,258) for each of the two years ended December 31, 1996 and 1997. Also, as of August 1, 1995, Billion Luck entered into an Employment Agreement with Li Fei Lie. In accordance with the terms of the Employment Agreement, Mr. Li has been employed by Billion Luck to perform such duties with respect to Billion Luck as Billion Luck's Board of Directors shall from time to time determine. Mr. Li shall receive a base salary of HK$240,000 (US$30,968) plus allowances of HK$300,000 (US$38,710) 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 -31- greater amount as Billion Luck's Board of Directors may determine. The Employment Agreement has a term of three (3) years unless earlier terminated as provided therein. See "Certain Relationships and Related Transactions." In addition, on 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 (US34,839) 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, 1997, a consulting fee of HK$2,840,000 (US$366,452), was paid to Brender Services Limited. See "Certain Relationships and Related Transactions." Except for the foregoing, the Company has no employment contracts with any of its officers or directors and maintains no retirement, fringe benefit or similar plans for the benefit of its officers or directors. The Company may, however, enter into employment contracts with its officers and key employees, adopt various benefit plans and begin paying compensation to its officers and directors as it deems appropriate to attract and retain the services of such persons. The Company does not pay fees to directors for their attendance at meetings of the Board of Directors or of committees; however, the Company may adopt a policy of making such payments in the future. The Company will reimburse out-of-pocket expenses incurred by directors in attending Board and committee meetings. During the fiscal year ended December 31, 1997, 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, 1997, 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, 1998 the number of shares owned by each such person and the percentage of the outstanding shares represented thereby.
Amount and Name and Address Nature of Percent of of Beneficial Owner Beneficial Ownership (1) Class ------------------- ------------------------ ----- Everbright Growth Fund 334,800 Common Stock 5.55% 36/F., Far East Finance Centre 16 Harcourt Road Admiralty, Hong Kong Worlder International Company 486,000 Common Stock 8.06% Limited (2) 21/F., Great Eagle Centre No. 23 Harbour Road Hong Kong China Everbright Financial Holdings 3,200,000 Series B Preferred 100% Limited 36/F., Far East Finance Centre 16 Harcourt Road Admiralty, Hong Kong
-32- (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, 1998, 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.
Amount and Name of Nature of Percent of Beneficial Owner Beneficial Ownership (1) Class ---------------- ------------------------ ----- Li Shunxing -0- N/A Han Jian Zhun -0- (2) N/A Tam Cheuk Ho -0- (3) N/A Zhang Yibing -0- N/A Li Fei Lie -0- (4) N/A Wong Wah On 43,200 Common Stock(5) 0.72% All executive officers 43,200 Common Stock 0.72% and directors as a group
(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. -33- (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. 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: Yiu Yat Hung (former director) 6,000 shares Tam Cheuk Ho 6,000 shares Han Jian Zhun 6,000 shares Wong Wah On 6,000 shares Li Fei Lie 100,000 shares -34- 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 600 shares Tam Cheuk Ho 600 shares Han Jian Zhun 600 shares Wong Wah On 600 shares Li Fei Lie 10,000 shares Brender Services Limited 10,000 shares Cheung Yu Shum 50,000 shares Tse Chi Kai 30,000 shares Ma Sin Ling 50,000 shares Cheung Siu Yin 1,000 shares Woo Pui Yan 1,000 shares Kwok Kwan Hung 38,600 shares Fu Yang Guang 20,000 shares Lin Jia Ping 27,000 shares -35- [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 11, 1994, HARC entered into an agreement with Guilinyang Farm pursuant to which Guilinyang Farm agreed to sell and HARC agreed to buy a 6.6% equity interest in Zhong Ya Aluminum Factory (the "Aluminum Factory"), an aluminum processing plant in Hainan, for consideration totalling Rmb5 million (US$603,865). In accordance with the terms of the agreement, HARC will be entitled to a minimum annual return of Rmb1 million ($120,773) in the Aluminum Factory for a two-year period from the date of acquisition. Thereafter, HARC will be entitled to pro rata distributions of the profit obtained from the operation of the Aluminum Factory in proportion to its percentage interest therein. The 6.6% equity interest in the Aluminum Factory was subsequently assigned to First Supply by HARC. On December 29, 1997, First Supply entered into an agreement with Guilinyang Farm pursuant to which HARC agreed to sell the 6.6% equity interest in the Aluminum Factory and to assign the amount receivable from the Aluminum Factory to Guilingyang Farm at a total consideration of Rmb7,000,000 (US$845,411). 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 -36- commodities, a Hainan State Farm requests a price quote for a specified quantity of a particular item from HARC or the Operating Subsidiaries, and HARC or an Operating Subsidiary provides a quote. Upon receiving the price quote, the Hainan State Farm can obtain quotes from other suppliers based on the same quantity of the requested item. The Hainan State Farm must inform HARC or the Operating Subsidiaries, as the case may be, of the amounts of the other quotes and, if any of the quotes are lower, HARC or the Operating Subsidiaries have the right to lower its quote to the level of the competing quote. If HARC or an Operating Subsidiary matches the competing quote based upon the same quantity of item requested, the Hainan State Farm must purchase the item from HARC or the applicable Operating Subsidiary. Otherwise, the Hainan State Farm can purchase the item from the competing supplier. The Sale and Purchase Agreement has a term of 15 years and, subject to applicable law, may not be terminated earlier except upon the agreement of the parties. The Sale and Purchase Agreement will expire on November 5, 2009. On March 30, 1995, parties entered into a Supplementary Agreement which clarified certain terms of the Sale and Purchase Agreement among the parties dated November 5, 1994, including the definitions of "annual gross profit margin" and "rubber sales revenue." The Supplementary Agreement is effective as long as the Sale and Purchase Agreement remains effective. 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 -37- 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, 1997, a consulting fee of HK$2,840,000 (US$366,452) was paid to Brender Services Limited. As of August 1, 1995, Billion Luck entered into an Employment Agreement with Han Jian Zhun. Mr. Han Jian Zhun is presently the Chairman of the Board of Directors the Company and the president of HARC, but, in accordance with the terms of the Employment Agreement, Mr. Han Jian Zhun has been employed by Billion Luck to perform such duties with respect to Billion Luck as Billion Luck's Board of Directors shall from time to time determine. Mr. Han Jian Zhun shall receive a base salary of HK$12,000 (US$1,548) annually, which base salary shall be adjusted on each anniversary of the Employment Agreement to reflect a change in the applicable consumer price index or such greater amount as Billion Luck's Board of Directors may determine. The Employment Agreement has a term of three (3) years unless earlier terminated as provided therein. As of August 1, 1995, Billion Luck entered into an Employment Agreement with Li Fei Lie. Mr Li is presently the Project Manager of the Company and the vice president and a director of HARC, but, in accordance with the terms of the Employment Agreement, Mr. Li has been employed by Billion Luck to perform such duties with respect to Billion Luck as Billion Luck's Board of Directors shall from time to time determine. Mr. Li shall receive a base salary of HK$240,000 (US$30,968) annually, which base salary shall be adjusted on each anniversary of the Employment Agreement to reflect a change in the applicable consumer price index or such greater amount as Billion Luck's Board of Directors may determine. The Employment Agreement has a term of three (3) years unless earlier terminated as provided therein. During the three fiscal years ended December 31, 1995, 1996 and 1997, 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 Rmb4.4 million (US$531,401), Rmb3.5 million (US$422,705) and Rmb0.3 million (US$36,232) in 1995, 1996 and 1997, 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 -38- 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, 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 December 29, 1997, HARC entered into a Stock Transfer Agreement with Guilingyang Farm pursuant to which Guilinyang Farm agreed to sell and HARC agreed to buy 28,000,000 legal person shares representing 5.3% of the total issued and outstanding share capital of Hainan Sundiro Motorcycle Company Ltd., a PRC company listed on the Shenzhen Stock Exchange of the PRC, for a consideration totaling Rmb140,000,000 (US$16,908,213). In addition to these transactions, the following business relationships existed during the fiscal year ended December 31, 1997, for which disclosure is required: As disclosed in "Management and Certain Security Holders," hereinabove, Han Jian Zhun, the Chairman of the Board of Directors of the Company, also serves as the Deputy 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. -39- [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, 1995, 1996 and 1997 b. Consolidated statements of changes in shareholders' equity for the three years ended December 31, 1995, 1996 and 1997 c. Consolidated balance sheets as of December 31, 1996 and 1997 d. Consolidated statements of cash flows for the three years ended December 31, 1995, 1996 and 1997 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.) -40- 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 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.) -41- 10.10 Land Use Agreement dated November 5, 1994, by and between Hainan Province Agricultural Reclamation No. 1 Materials Supply & Sales Company (First Supply) and Hainan Province Agricultural Reclamation Jin Long Materials General Company (Original Chinese version with certified English translation filed with Annual Report on Form 10-K/A for the fiscal year ended December 31, 1994, and incorporated herein by reference.) 10.11 Land Use Agreement dated November 5, 1994, by and between Hainan Province Agricultural Reclamation No. 2 Materials Supply & Sales Company (Second Supply) and Hainan Province Agricultural Reclamation Jin Huan Materials General Company (Original Chinese version with certified English translation filed with Annual Report on Form 10-K/A for the fiscal year ended December 31, 1994, and incorporated herein by reference.) 10.12 Long-Term Sale and Purchase Agreement dated November 5, 1994, by and among Hainan Province Agricultural Reclamation General Company (the Farming Bureau), Hainan Agricultural Resources Company Ltd., Hainan Province Agricultural Reclamation No. 1 Materials Supply & Marketing Company (First Supply), and Hainan Province Agricultural Reclamation No. 2 Materials Supply & Marketing Company (Second Supply) (Original Chinese version with English translation filed with Annual Report on Form 10-K/A for the fiscal year ended December 31, 1994, and incorporated herein by reference.) 10.13 Agreement on Assignment of Accounts Receivable dated November 5, 1994, by and among Hainan Province Agricultural Reclamation General Company (the Farming Bureau), Billion Luck Company Ltd., Hainan Province Guilinyang State Farm, Hainan Agricultural Resources Company Ltd., Hainan Province Agricultural Reclamation No. 1 Materials Supply & Marketing Company (First Supply), and Hainan Province Agricultural Reclamation No. 2 Materials Supply & Marketing Company (Second Supply) (Original Chinese version with English translation filed with Annual Report on Form 10-K/A for the fiscal year ended December 31, 1994, and incorporated herein by reference.) 10.14 Rental Agreement, by and between General Bureau of Hainan State Farms (the Farming Bureau) and Hainan Agricultural Resources Company Limited (Original Chinese version with English Translation filed with Annual Report on Form 10-K/A for the fiscal year ended December 31, 1994, and incorporated herein by reference.) 10.15 Guaranty Agreement, by and among Hainan Province Agricultural Reclamation General Company (the Farming Bureau), Hainan Agricultural Reclamation No. 1 Materials Supply & Sales Company (First Supply) and Hainan Agricultural Reclamation No. 2 Materials Supply & Sales Company (Second Supply) (Original Chinese version with certified English Translation filed with Annual Report on Form 10-K/A for the fiscal year ended December 31, 1994, and incorporated herein by reference.) 10.16 Financial Consulting Agreement dated February 1, 1994, by and between Brender Services Limited and Billion Luck Company Ltd., and Extension Agreement dated November 1, 1994, by and between Brender Services Limited and Billion Luck Company Ltd. (Filed with Annual Report on Form 10-K/A for the fiscal year ended December 31, 1994, and incorporated herein by reference.) 10.17 Exchange Agreement, by and among the Registrant, Hong Wah Investment Holdings Limited, Everbright Finance & Investment Co. Ltd., Worlder International Company Limited and Silverich Limited, executed as of March 31, 1995 (Filed with Quarterly Report on Form 10-Q/A for the fiscal quarter ended March 31, 1995, and incorporated herein by reference.) 10.18 China Resources Development, Inc., 1995 Stock Option Plan, adopted as of March 31, 1995 (Filed with Quarterly Report on Form 10-Q/A for the fiscal quarter ended March 31, 1995, and the Current Report on Form 8-K dated June 19, 1995, and incorporated herein by reference.) -42- 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.) -43- 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 herewith.) 10.39 Stock Purchase Agreement, by and between HARC and Guilinyang Farm, dated December 29, 1997. (Certified English translation of original Chinese version filed herewith.) 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 herewith.) 11.3 Computation of Earnings Per Share for Fiscal Year ended December 31, 1997 (Contained in Financial Statements filed herewith.) 21 Subsidiaries of the Registrant (Contained in Financial Statements 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 30, 1997 (Filed with Schedule 14A dated December 20, 1997, and incorporated herein by reference.) -44- During the last quarter of the fiscal year ended December 31, 1997, the Company filed no reports on Form 8-K. However, on March 9, 1998, the Company filed a report on Form 8-K dated December 29, 1997, which reported, in Item 5, the acquisition by HARC of 28,000,000 legal person shares of Hainan Sundiro Motorcsycle Company Limited, and certain changes to the Company's board of directors. No financial statements were filed. -45- 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.
Signature Title Date --------- ----- ---- /s/ Han Jian Zhun Chairman of the Board of April 15, 1998 - ----------------------------- Directors Han Jian Zhun /s/ Li Shunxing President/Director April 15, 1998 - ----------------------------- Li Shunxing /s/ Zhang Yibing Vice President/Director April 15, 1998 - ----------------------------- Zhang Yibing /s/ Tam Cheuk Ho Chief Financial Officer/ April 15, 1998 - ----------------------------- Director Tam Cheuk Ho /s/ Wong Wah On Financial Controller/ April 15, 1998 - ----------------------------- Director/Secretary Wong Wah On /s/ Ching Lung Po Director April 15, 1998 - ----------------------------- Ching Lung Po /s/ Wan Ying Lin Director April 15, 1998 - ----------------------------- Wan Ying Lin
-46- 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, 1995, 1996 and 1997 b. Consolidated statements of changes in shareholders' equity for the three years ended December 31, 1995, 1996 and 1997 c. Consolidated balance sheets as of December 31, 1996 and 1997 d. Consolidated statements of cash flows for the three years ended December 31, 1995, 1996 and 1997 e. Notes to consolidated financial statements. -47- Consolidated Financial Statements CHINA RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES December 31, 1995, 1996 and 1997 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 changes in shareholders' equity F-3 Consolidated balance sheets F4 - F5 Consolidated statements of cash flows F-6 Notes to consolidated financial statements F-7 - F-37 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 its subsidiaries as of December 31, 1996 and 1997, and the related consolidated statements of income, changes in shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1997. 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 its subsidiaries at December 31, 1996 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, 1997, in conformity with accounting principles generally accepted in the United States of America. ERNST & YOUNG Hong Kong February 18, 1998 F-1 CHINA RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Amounts in thousands, except share and per share data)
Year ended December 31, Notes 1995 1996 1997 1997 RMB RMB RMB US$ NET SALES* 1,957,243 1,827,499 1,149,171 138,789 COST OF SALES* (1,851,186) (1,677,056) (1,092,972) (132,001) --------- --------- --------- --------- GROSS PROFIT 106,057 150,443 56,199 6,788 DEPRECIATION (2,820) (1,813) (1,429) (173) SELLING, GENERAL AND ADMINISTRATIVE EXPENSES* (54,442) (50,488) (32,934) (3,978) FINANCIAL INCOME/ (EXPENSES), NET* 4 (33,212) (19,870) 145 18 OTHER INCOME, NET* 5 28,654 6,054 30,580 3,693 --------- --------- --------- --------- INCOME BEFORE INCOME TAXES 44,237 84,326 52,561 6,348 INCOME TAXES 6 (6,909) (13,991) (9,798) (1,183) --------- --------- --------- --------- INCOME BEFORE MINORITY INTERESTS 37,328 70,335 42,763 5,165 MINORITY INTERESTS (18,153) (34,513) (24,563) (2,967) --------- --------- --------- --------- NET INCOME 19,175 35,822 18,200 2,198 ========= ========= ========= ========= EARNINGS PER SHARE 7 Basic 15.98 10.14 3.05 0.37 ========= ========= ========= ========= Diluted 15.49 10.02 3.04 0.37 ========= ========= ========= =========
* Including the following amounts resulting from transactions with related parties (note 14):
Year ended December 31, 1995 1996 1997 1997 RMB RMB RMB US$ NET SALES 107,722 205,694 278,051 33,581 COST OF SALES (1,619,392) (1,412,835) (993,557) (119,995) SELLING, GENERAL AND AND ADMINISTRATIVE EXPENSES (1,985) (2,381) (6,981) (843) FINANCIAL INCOME/(EXPENSES), NET 12,492 25,031 10,509 1,269 OTHER INCOME, NET 3,576 (926) 1,485 179
The accompanying notes are an integral part of these consolidated financial statements. F-2 CHINA RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Amounts in thousands, except share and per share data)
Series B Series A convertible Series B Additional Common preferred preferred preferred paid-in Retained Notes stock stock stock stock capital Reserves earnings Total RMB RMB RMB RMB RMB RMB RMB RMB Balance at December 31, 1994 101 -- -- -- 1,407 2,657 7,625 11,790 Issuance of 6,400,000 shares of series A preferred stock 12 -- 53,930 -- -- -- -- -- 53,930 Issuance of 370 shares of series B convertible preferred stock, net of share offering costs 12 -- -- -- -- 19,554 -- -- 19,554 Net income -- -- -- -- -- -- 19,175 19,175 Transfer to reserves 18 -- -- -- -- -- 6,273 (6,273) -- ------ ------ ------ ------ ------- ----- -------- -------- Balance at December 31, 1995 101 53,930 -- -- 20,961 8,930 20,527 104,449 Issuance of 1,283 shares of series B convertible preferred stock, net of share offering costs 12 -- -- -- -- 72,520 -- -- 72,520 Conversion of 1,653 shares of series B convertible preferred stock to 4,579,004 shares of common stock 12 383 -- -- -- (383) -- -- -- Exchange of 6,400,000 shares of series A preferred stock for 3,200,000 shares of common stock with substantial restrictions ("Restricted Common Stock") 12 270 (53,930) -- -- 53,660 -- -- -- Reverse stock split, ten-to-one 12 (679) -- -- -- 679 -- -- -- Exchange of 3,200,000 shares of Restricted Common Stock for 3,200,000 shares of series B preferred stock 12 (27) -- -- 27 -- -- -- -- Net income -- -- -- -- -- -- 35,822 35,822 Transfer to reserves 18 -- -- -- -- -- 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 12 2 -- -- -- 6,298 -- -- 6,300 Issuance of 350,000 common stock warrants to non- employees 13 -- -- -- -- 3,681 -- -- 3,681 Net income -- -- -- -- -- -- 18,200 18,200 Transfer to reserves 18 -- -- -- -- -- 7,766 (7,766) -- ------ ------ ------ ------ ------- ----- -------- -------- Balance at December 31, 1997 50 -- -- 27 157,416 25,514 57,965 240,972 ======== ======== ======== ======== ======== ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. F-3 CHINA RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Amounts in thousands, except share and per share data)
December 31, Notes 1996 1997 1997 RMB RMB US$ ASSETS CURRENT ASSETS Cash and cash equivalents 131,006 124,547 15,042 Trade receivables 4,212 11,249 1,359 Inventories 8 55,452 61,792 7,463 Other receivables, deposits and prepayments 48,755 29,139 3,519 Amount due from Farming Bureau 14 298,570 14,921 1,802 Amounts due from related companies 14 147,221 40,044 4,836 ------- ------- ------- TOTAL CURRENT ASSETS 685,216 281,692 34,021 PROPERTY AND EQUIPMENT, NET 9 6,504 7,496 905 INVESTMENTS 10 12,344 147,671 17,835 GOODWILL 1,049 1,021 123 ------- ------- ------- TOTAL ASSETS 705,113 437,880 52,884 ======= ======= =======
F-4 CHINA RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (continued) (Amounts in thousands, except share and per share data)
December 31, Notes 1996 1997 1997 RMB RMB US$ LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Bank loans 11 292,560 - - Accounts payable 25,848 20,284 2,450 Other payables and accrued liabilities 43,295 21,106 2,549 Amounts due to shareholders 14 4,976 - - Income taxes payable 17,063 22,375 2,702 ------- ------- ------- TOTAL CURRENT LIABILITIES 383,742 63,765 7,701 MINORITY INTERESTS 108,580 133,143 16,080 ------- ------- ------- TOTAL LIABILITIES AND MINORITY INTERESTS 492,322 196,908 23,781 ------- ------- ------- COMMITMENTS AND CONTINGENCIES 19 SHAREHOLDERS' EQUITY Common stock, US$0.001 par value: Authorized - 200,000,000 shares in 1997 and 1996 Issued and outstanding - 6,029,004 shares in 1997 and 5,779,004 shares in 1996 12 48 50 6 Preferred stock, authorized - 10,000,000 shares in 1997 and 1996: Series B preferred stock, US$0.001 par value: Authorized - 3,200,000 shares in 1997 and 1996 Issued and outstanding - 3,200,000 shares in 1997 and 1996 12 27 27 3 Additional paid-in capital 147,437 157,416 19,012 Reserves 18 17,748 25,514 3,081 Retained earnings 18 47,531 57,965 7,001 ------- ------- ------- TOTAL SHAREHOLDERS' EQUITY 212,791 240,972 29,103 ------- ------- ------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 705,113 437,880 52,884 ======= ======= =======
The accompanying notes are an integral part of these consolidated financial statements. F-5 CHINA RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands, except share and per share data)
Year ended December 31, 1995 1996 1997 1997 RMB RMB RMB US$ OPERATING ACTIVITIES Net income 19,175 35,822 18,200 2,198 Adjustments to reconcile net income to net cash provided by/(used in) operating activities: Depreciation and amortization 2,848 1,840 1,457 176 Stock-based compensation issued to non-employees -- -- 3,680 445 Minority interests 18,153 34,513 24,563 2,967 Loss/(gain) on disposal of property and equipment, net (1,326) -- 463 56 Decrease/(increase) in assets: Trade receivables (9,995) (64,774) (7,037) (850) Inventories (12,025) 20,338 (6,340) (766) Other receivables, deposits and prepayments (8,249) (38,549) 25,917 3,130 Amount due from Farming Bureau (80,427) (26,061) (8,911) (1,076) Amounts due from related companies (23,793) (65,718) (27,823) (3,360) Other current assets (5,054) 5,054 -- -- Increase/(decrease) in liabilities: Accounts payable (2,364) 47,661 (5,564) (672) Other payables and accrued liabilities (6,647) 59,697 (22,189) (2,680) Amount due to Farming Bureau (14,978) -- -- -- Amounts due to related companies and shareholders (813) 113,280 (4,976) (601) Income taxes payable 6,602 6,798 5,312 641 -------- -------- -------- -------- Net cash provided by/(used in) operating activities (118,893) 129,901 (3,248) (392) -------- -------- -------- -------- INVESTING ACTIVITIES Purchases of property and equipment (4,275) (2,663) (2,884) (348) Purchases of investments -- (2,342) (327) (40) Proceeds from sale of construction in progress 19,299 -- -- -- Proceeds from sale of property and equipment 1,935 16 -- -- Proceeds from the sale of investments 59 -- -- -- Loans to related companies (21,072) (67,046) -- -- -------- -------- -------- -------- Net cash used in investing activities (4,054) (72,035) (3,211) (388) -------- -------- -------- -------- FINANCING ACTIVITIES Issue of share capital less share offering costs 9,831 86,914 -- -- Loans from shareholders 5,807 -- -- -- Repayment of loans from shareholders -- (15,727) -- -- Proceeds from bank borrowings 175,000 -- -- -- Repayments of bank borrowings (170,323) (440) -- -- Loan from Farming Bureau -- 35,868 -- -- Short term advances 86,917 -- -- -- Repayment of short term advances -- (86,917) -- -- Loans from related companies 3,500 -- -- -- Repayment of loans from related companies -- (3,500) -- -- -------- -------- -------- -------- Net cash provided by financing activities 110,732 16,198 -- -- -------- -------- -------- -------- NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS (12,215) 74,064 (6,459) (780) Cash and cash equivalents, at beginning of year 69,157 56,942 131,006 15,822 -------- -------- -------- -------- Cash and cash equivalents, at end of year 56,942 131,006 124,547 15,042 ======== ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. F-6 CHINA RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except share and per share data) 1. ORGANIZATION AND PRINCIPAL ACTIVITIES China Resources Development, Inc. (the "Company") was formerly known as Magenta Corporation ("Magenta") which was incorporated on January 15, 1986 in the State of Nevada, the United States of America. Following a reverse acquisition by the former shareholders of Billion Luck Company Limited ("Billion Luck") in December 1994, the Company became the holding company of Billion Luck and its subsidiaries (collectively the "Group"). Billion Luck was incorporated in the British Virgin Islands on December 14, 1993. Billion Luck's principal activity is to conduct activities through its subsidiaries and its principal asset is a 56% equity interest in Hainan Agricultural Resources Company Limited, which changed its name to Hainan Zhongwei Agricultural Resources Company Limited ("Hainan Agricultural") in 1997. Pursuant to an agreement dated January 31, 1994 between Billion Luck, Guilinyang State Farm (the "Guilinyang"), and the Hainan Farming Bureau (the "Farming Bureau"), a division of the Ministry of Agriculture of the People's Republic of China (the "PRC"), Hainan Agricultural was established as a joint stock company in the PRC on June 28, 1994 to act as the holding company of First Goods And Materials Supply And Sales Corporation ("First Supply") and Second Goods And Materials Supply And Sales Corporation ("Second Supply") which are principally engaged in the distribution of natural rubber and the procurement of materials, supplies and other agricultural products in the PRC. Hainan Agricultural has a registered capital of RMB100,000. The contributions to the registered capital are as follows: Billion Luck 56% Farming Bureau 39% Guilinyang 5% 2. BASIS OF PRESENTATION The consolidated financial statements included the accounts of the Company and its subsidiaries. The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America ("US GAAP"). This basis of accounting differs from that used in the statutory financial statements of the subsidiaries in the PRC which are prepared in accordance with the accounting principles and the relevant financial regulations in the PRC ("PRC GAAP"). The principal adjustments made to the PRC GAAP statutory financial statements of PRC subsidiaries to conform with US GAAP are the write-off of pre-operating expenses and the recognition/deferral of realized and unrealized gains or losses from commodity futures contracts for hedging and non-hedging purposes. F-7 CHINA RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except share and per share data) 3. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (a) Principles of consolidation The consolidated financial statements include the accounts of the Company and its subsidiaries. Significant intercompany balances and transactions have been eliminated on consolidation. (b) Cash and cash equivalents The Group considers cash and cash equivalents to include cash on hand and demand deposits with banks with original terms to maturity of three months or less. At December 31, 1996 and 1997, cash and cash equivalents included foreign currency deposits equivalent to RMB37,772 (US$3,445 and HK$8,578) and RMB3,442 (US$384 and HK$246), respectively. (c) Inventories Inventories are stated at the lower of cost and market value, 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. (d) 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. The principal annual rates used for this purpose are as follows: Buildings 4% Leasehold improvements Over the term of the lease Machinery, equipment and motor vehicles 8-10% (e) Investments Investments in companies that are at least 20% to 50% owned, and over which the Group is in a position to exercise a 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. F-8 CHINA RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except share and per share data) 3. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (continued) (f) Retirement benefits The contributions to the retirement plans for employees under defined contribution retirement plans are charged to earnings as services are provided. (g) Goodwill Goodwill is amortized on the straight-line basis over 40 years. (h) Long-lived assets Statement of Financial Accounting Standard No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" ("SFAS 121") requires impairment losses be recognized for long-lived assets, whether these assets are held for disposal or continue to be used in operations, when indicators of impairment are present and the fair value of these assets are estimated to be less than their carrying amounts. (i) 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. Under APB 25, because the exercise price of employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recorded. For disclosure purposes, pro forma information in accordance with Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation" ("SFAS 123") has been included in the note 13 to the consolidated financial statements. 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 is 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. F-9 CHINA RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except share and per share data) 3. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (continued) (j) Futures contracts As part of its risk management strategy, 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. 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. Future 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 recognized in earnings when realized as an adjustment to cost of sales. Unrealized changes in fair value 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. (k) Revenue recognition Sales represent the invoiced value of goods sold, net of returns. Revenue is recognized upon delivery of goods to customers. (l) Income taxes Income taxes have been provided using the liability method in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). (m) 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-10 CHINA RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except share and per share data) 3. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (continued) (n) Earnings per share In 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"). SFAS 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods have been presented and, where appropriate, restated to conform to SFAS 128 requirements. (o) Foreign currency translation The financial records of the subsidiaries except for Billion Luck are maintained and their statutory financial statements are stated in Renminbi ("RMB"), the national currency of the PRC. Transactions and monetary assets and liabilities denominated in other currencies 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. Income statement amounts are translated at the average Exchange Rates for the period. The resulting exchange gains or losses are credited or charged to the consolidated statements of income. The books and records of the Company and Billion Luck are maintained in United States dollars ("US$") and Hong Kong dollars ("HK$"), respectively. The records of the Company and Billion Luck are translated into RMB using the respective applicable Exchange Rate prevailing at the date of the transactions. Monetary assets and liabilities in US$, HK$ and other foreign currencies are translated using the applicable Exchange Rates at the balance sheet dates. Income statement amounts are translated at the average Exchange Rates for the period. The resulting exchange gains or losses are credited or charged to the consolidated statements of income. F-11 CHINA RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except share and per share data) 3. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (continued) (o) Foreign currency translation (continued) The translation of amounts from RMB into US$ for the convenience of the reader has been made at the Exchange Rate quoted by the People's Bank of China on December 31, 1997 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, 1997 or at any other date. The market risks associated with changes in exchange rates and the restrictions over the convertibility of RMB into foreign currencies are discussed in note 20. (p) Use of estimates The preparation of consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. (q) Comparative amounts Certain comparative amounts have been reclassified to conform with the current year's presentation. 4. FINANCIAL INCOME/(EXPENSES), NET Financial income/(expenses), net represent:
Year ended December 31, 1995 1996 1997 RMB RMB RMB Interest expenses (52,409) (48,495) (15,007) Interest income 18,575 29,602 14,849 Foreign exchange gains/(losses), net 622 (977) 303 ------ ------ ------ (33,212) (19,870) 145 ====== ====== ======
In connection with the restructuring of operations as set out in note 14(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 14(e)). F-12 CHINA RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except share and per share data) 5. OTHER INCOME, NET Other income, net represents:
Year ended December 31, Notes 1995 1996 1997 RMB RMB RMB Income from long term investments 2,000 1,525 - Rental income 5,297 3,474 1,024 Net gains on trading of commodity futures contracts 3(j) 10,614 1,374 28,375 Service fee to the Farming Bureau 14(c) - (5,000) - Management fee income 14(d) 6,000 6,000 - Commission received from Jin Huan 14 - - 1,833 Loss/(gain) on disposal of property and equipment, net 1,326 - (463) Others 3,417 (1,319) (189) ------ ------ ------ 28,654 6,054 30,580 ====== ====== ======
6. INCOME TAXES It is management's intention to reinvest all the income attributable to the Company earned by its operations outside the United States of America (the "USA"). Accordingly, no USA corporate income taxes have been provided in these financial statements. Under current British Virgin Islands' law, any dividends the Group will distribute in the future and capital gains arising from the Group's investments are not subject to income taxes in the British Virgin Islands. The Group's PRC subsidiaries are subject to a tax rate of 15% on income reported in their statutory financial statements. However, Hainan Agricultural has been granted a tax holiday under the PRC income tax laws with a tax exemption in the first year which is the period from June 28, 1994 (date of registration) to December 31, 1994 and a 50% tax deduction in the second year of operation which is the year ended December 31, 1995 (tax saving attributable to the Group of RMB209 or RMB0.17 per share, after adjusting for the Reverse Stock Split in 1996). There will be no tax deduction thereafter. F-13 CHINA RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except share and per share data) 6. INCOME TAXES (continued) A reconciliation between the actual income tax expenses and income taxes computed by applying the statutory PRC tax rate applicable to foreign investment enterprises operating in Hainan, a Special Economic Zone in the PRC, to the income before income taxes is as follows:
Year ended December 31, 1995 1996 1997 RMB RMB RMB Statutory PRC tax rate 15% 15% 15% Computed expected tax expenses 6,636 12,649 7,884 Impact of tax holiday of Hainan Agricultural (374) - - Item which gives rise to no tax benefit: Net loss of the Company and Billion Luck 669 1,160 1,974 Others (22) 182 (60) ------ ------ ------ Taxation charge for the year 6,909 13,991 9,798 ====== ====== ======
Undistributed earnings of the Company's foreign subsidiaries amounted to RMB55,190 and RMB79,549 at December 31, 1996 and 1997, respectively. Because those earnings are considered to be indefinitely invested, no provision for USA corporate income taxes on those earnings has been provided. Upon distribution of those earnings in the form of dividends or otherwise, the Company would be subject to USA corporate income taxes. Unrecognized deferred USA corporate income tax in respect of these undistributed earnings, less the Company's accumulated losses available for deduction for tax purposes, as at December 31, 1996 and 1997 was RMB16,161 and RMB19,708, respectively. No deferred income taxes have been provided based on the liability method prescribed by SFAS 109 because the effect of all temporary differences is considered immaterial. F-14 CHINA RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except share and per share data) 7. EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share:
Year ended December 31, 1995 1996 1997 RMB RMB RMB Income (numerator): Basic and diluted earnings per share: Income available to common stockholders 19,175 35,822 18,200 ========= ========= ========= Shares (denominator): Basic earnings per share: Weighted average number of shares 1,200,000 3,533,512 5,958,171 Effect of dilutive securities: Series B convertible preferred stock 5,789 - - Stock options 32,096 42,446 - Warrants - - 17,451 --------- --------- --------- Dilutive potential common shares 37,885 42,446 17,451 --------- --------- --------- Diluted earnings per share: Adjusted weighted average shares and assumed conversions 1,237,885 3,575,958 5,975,622 ========= ========= ========= Basic earnings per share 15.98 10.14 3.05 ========= ========= ========= Diluted earnings per share 15.49 10.02 3.04 ========= ========= =========
For the years ended December 31, 1995 and 1996, the weighted average numbers 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, 1995. Details of the series B convertible preferred stock, stock options and warrants of the Company are set out in notes 12 and 13 of the consolidated financial statements, respectively. F-15 CHINA RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except share and per share data) 7. EARNINGS PER SHARE (continued) Options to purchase 240,000 shares of common stock at US$4.20 (RMB34.78) per share were outstanding during 1997 but were not included in the computation of diluted earnings per share for the year ended December 31, 1997 because the options' exercise price was greater than the average market price of the common shares during the year and, therefore, the effect would be antidilutive. The options, which expire on May 20, 2006, were still outstanding at December 31, 1997. 8. INVENTORIES Inventories comprise:
December 31, Note 1996 1997 RMB RMB Finished goods, at cost 62,167 61,792 Less: Deferred gains on related hedging futures contracts 3(j) (6,715) -- ------- ------- Finished goods, net 55,452 61,792 ======= =======
9. PROPERTY AND EQUIPMENT, NET Property and equipment comprise:
December 31, 1996 1997 RMB RMB At cost: Buildings and leasehold improvements 3,806 5,267 Machinery, equipment and motor vehicles 5,909 6,599 ------ ------ 9,715 11,866 Accumulated depreciation (3,211) (4,370) ------ ------ 6,504 7,496 ====== ======
F-16 CHINA RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except share and per share data) 10. INVESTMENTS Investments comprise:
December 31, Notes 1996 1997 RMB RMB Equity method investment (a) 1,743 1,743 Cost method investments (b) 10,601 145,928 ------ ------- 12,344 147,671 ====== =======
(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, 1997, Far East has not yet commenced operations. (b) Cost method investments comprise:
December 31, 1996 1997 RMB RMB Investments in: Unlisted shares 601 928 Hainan Sundiro Motorcycle Stock Company Limited ("Sundiro") - 140,000 PRC joint ventures 10,000 5,000 ------ ------- 10,601 145,928 ====== =======
F-17 CHINA RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except share and per share data) 10. INVESTMENTS (continued) Cost method investments are equity interests in PRC unlisted companies in which the Group does not have a significant influence over their operating and financial policies. The investment in Sundiro represents the cost of Hainan Agricultural's 5.3% equity interest in the investee acquired from Guilinyang in 1997. The PRC joint ventures at December 31, 1996 represented First Supply's and Second Supply's investments in Hainan State-owned Zhong Ya Aluminum Factory ("Zhong Ya") and Xilian Farm Timber Mill ("Xilian Mill"), of RMB5,000 each. In 1997, First Supply disposed of its entire equity interest in Zhong Ya to Guilinyang for a total consideration of RMB5,000. The purchase consideration of Sundiro and the sales proceeds of Zhong Ya have been used to offset the amount due from Guilinyang (note 15). 11. BANK LOANS The Group's short term bank loans as at December 31, 1996 were all denominated in Renminbi. The short term bank loans were generally secured by guarantees given by the Farming Bureau, with original maturities not more than one year at a weighted average interest rate of 14.32% per annum as at December 31, 1996. Pursuant to an Asset and Staff Transfer Agreement, all the bank loans were transferred to the Farming Bureau in March 1997 (note 14(e)). 12. SHARE CAPITAL On March 31, 1995, the Board of Directors of the Company approved an Action by Written Consent to amend the Company's Articles of Incorporation to authorize 10,000,000 shares of preferred stock, of which 6,400,000 shares were designated as series A preferred stock, par value US$1 (RMB8.32) per share. In 1995, pursuant to the Action by Written Consent and an exchange agreement between the Company and certain shareholders of the Company, long term loans from certain shareholders of the Company in the aggregate of US$6,400 (RMB53,930) were exchanged for 6,400,000 shares of series A preferred stock of the Company. F-18 CHINA RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except share and per share data) 12. SHARE CAPITAL (continued) Pursuant to an exchange agreement dated as of July 22, 1996 between the Company and the holder of series A preferred stock at that date (the "Holder"), all the 6,400,000 outstanding shares of series A preferred stock of the Company were exchanged on a five for one basis 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 USA, the exchange ratio of five Restricted Common Stock for one series A preferred stock of the Company represents an exchange at fair market values. On December 9, 1995, the Company designated a series of 2,500 shares of the Company's authorized preferred stock as series B convertible preferred stock, par value US$0.001 (RMB0.008) per share. The Company issued a Confidential Offshore Offering Memorandum on October 20, 1995 and a Supplementary Memorandum on December 7, 1995 to offer for sale series B convertible preferred stock of the Company (the "First Share Offering") to certain non-residents of the United States of America in an offshore offering in reliance upon Regulation S promulgated under the Securities Act of 1933, as amended. As of December 31, 1995, gross proceeds of US$3,700 (RMB30,825) were received on the issuance of 370 shares of series B convertible preferred stock at a price of US$10,000 (RMB83,311) per share. As of March 8, 1996, the closing date of the First Share Offering, further gross proceeds of US$8,830 (RMB73,511) were received upon the issuance of 883 shares of series B convertible preferred stock at a price of US$10,000 (RMB83,251) per share. On June 30, 1996, the Company issued another Confidential Offshore Offering Memorandum in another offshore offering (the "Second Share Offering"), with terms similar to the First Share Offering. As of July 8, 1996, the closing date of the Second Share Offering, gross proceeds of US$4,000 (RMB33,300) were received on the issuance of 400 shares of series B convertible preferred stock at a price of US$10,000 (RMB83,251) per share. After deduction of share offering costs, net proceeds of RMB19,554 and RMB72,520 were received on the issuance of 370 shares and 1,283 shares of series B convertible preferred stock for the years ended December 31, 1995 and 1996, respectively. 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 CHINA RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except share and per share data) 12. 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 an one-for-one basis to 3,200,000 shares of series B preferred stock which have restrictions that are the same or more stringent than the Restricted Common Stock. Unlike the Restricted Common Stock, the restrictions on participation of dividends and distributions on dissolution will not lapse through the passage of time. On April 1, 1997, the Company entered into an 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 13) 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. F-20 CHINA RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except share and per share data) 13. 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 an " Unanimous Written Consent" of the committee appointed pursuant to the Plan and a resolution of a special meeting of the Board of Directors of the Company, the exercise price was changed to US$4.20 (RMB34.86) per share (the fair market value of the common stock as of May 20, 1996), after adjusting for the Reverse Stock Split in 1996. By virtue of that action, the outstanding options are now exercisable beginning on May 20, 1997 and until May 20, 2006. All stock options remained outstanding as of December 31, 1997. On December 30, 1996, a shareholders' meeting was held authorizing an amendment of the Plan increasing the number of common stock issuable under the Plan to 20% of the Company's outstanding common stock, as determined at the time of granting the stock options. Such shares may represent authorized but unissued shares as well as repurchased or forfeited shares for any grant under the Plan that was expired or unexercised. Further amendments were made to give the Board of Directors the ability to set a holding period of less than one year for non-qualified stock options. The Company has elected to follow APB 25 and related interpretations in accounting for its stock options because, as discussed below, the alternative fair value accounting provided for under 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 Company's stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. Pro forma information regarding net income and earnings per share is required by 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. F-21 CHINA RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except share and per share data) 13. STOCK OPTIONS AND WARRANTS (continued) 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 management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock options. For the purposes of pro forma disclosures, the estimated fair value of the options is amortized to write off the amount over the options' vesting period. The Company's pro forma information is as follows:
Year ended December 31, 1995 1996 1997 RMB RMB RMB Pro forma net income 15,669 28,566 10,770 ====== ====== ====== Pro forma earnings per share (note 7): Basic 13.06 8.08 1.81 ====== ====== ====== Diluted 12.66 7.99 1.80 ====== ====== ======
The Company's stock option activities and related information for the years ended December 31, 1995, 1996 and 1997 are summarized as follows:
1995 1996 1997 Exercise Exercise Exercise Options price Options price Options price -------------------- -------------------- --------------------- US$ US$ US$ Outstanding at beginning of year - - 240 37.8 240 4.2 Granted 240 37.8 - - - - Exercised - - - - - - Forfeited - - - - - - ---- ---- ---- Outstanding at end of year 240 37.8 240 4.2* 240 4.2 ==== ==== ====
*Exercise price modified in 1996. F-22 CHINA RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except share and per share data) 13. STOCK OPTIONS AND WARRANTS (continued) Warrants Pursuant to the Advertising and Media Agreement set out in note 12, in addition to the issue of 150,000 shares of common stock of the Company, 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 have an exercise price which ranges from US$2.69 (RMB22.27) to US$5.5 (RMB45.54) per share or a weighted-average exercise price of US$4.14 (RMB34.38). None of the warrants have been exercised as at December 31, 1997. 14. RELATED PARTY BALANCES AND TRANSACTIONS The Group's amounts due from/to Farming Bureau and related companies controlled by the Farming Bureau comprise:
December 31, 1996 1997 ------- -------- RMB RMB Due from Farming Bureau: Deposits for the purchase of natural rubber (note 14(a)) 229,372 - Others 69,198 14,921 ------- ------- 298,570 14,921 ======= ======= Due from related companies: Jin Long Corporation ("Jin Long") 50,562 23,024 Jin Huan Corporation ("Jin Huan") 44,359 6,139 Other related companies 52,300 10,881 ------- ------- 147,221 40,044 ======= =======
The balances with the Farming Bureau, related companies and shareholders of the Company are unsecured, interest-free and are repayable on demand. All of the amounts due from related companies are secured by a guarantee given by the Farming Bureau. F-23 CHINA RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except share and per share data) 14. RELATED PARTY BALANCES AND TRANSACTIONS (continued) In addition to those transactions set out in notes 10(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 of the Company.
Year ended December 31, Notes 1995 1996 1997 ------------------------------------------------ RMB RMB RMB Farming Bureau and related companies controlled by the Farming Bureau: Purchase of natural rubber (a) (1,652,707) (1,438,420) (1,011,662) Purchase discounts received (a) 31,217 16,162 - Guaranteed gross profit received (a) 2,098 9,423 18,105 Net sales of materials, supplies and other agricultural products (b) 106,092 205,694 32,117 Net sales of natural rubber 1,630 - 245,934 Interest income and rental in lieu of interest received 14,549 25,302 11,947 Interest expenses paid (679) - (1,438) Rental expenses paid (170) (188) (3,948) Disposal of construction in progress, property and equipment (21,072) - - Income from cost method investments 2,000 1,525 - Service fee paid (c) - (5,000) - Management fees received (d) 6,000 6,000 - Handling fee paid for the trading of natural rubber futures (4,424) (3,451) (348) Sales commission received - - 1,833 Transfer of assets and liabilities (e) - (227,950) 292,560 ========= ========= ========= Shareholders of the Company: Interest expenses paid (1,378) (271) - Consultancy fees paid (f) (1,815) (2,193) (3,033) ========= ========= =========
F-24 CHINA RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except share and per share data) 14. RELATED PARTY BALANCES AND TRANSACTIONS (continued) (a) Purchase of natural rubber Pursuant to a sales and purchase agreement dated November 5, 1994 (the "S&P Agreement") amongst the Farming Bureau, Hainan Agricultural, First Supply and Second Supply, the Farming Bureau agreed to guarantee the supply of natural rubber to First Supply and Second Supply for a period of 15 years from November 5, 1994 under the same terms and conditions as are offered to other purchasers of natural rubber with a first right of refusal to First Supply and Second Supply. First Supply and Second Supply also, from time to time, sourced natural rubber from other farms not owned or controlled by the Farming Bureau. The Farming Bureau allows First Supply and Second Supply to set the selling price of natural rubber according to market conditions, and guarantees a minimum gross profit margin of 3.5% (before purchase discounts set out below) earned by First Supply and Second Supply on natural rubber purchased from farms controlled by the Farming Bureau (the "Farms"). On March 30, 1995, the Group 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 Group was not obligated to purchase the Guaranteed Quantity. In consideration for this, the Group 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 Group for the purchase of natural rubber from the Farms. To optimize the return of its liquid funds, the Group 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 14(e). (b) Procurement of materials and supplies Pursuant to the S&P Agreement, the Farming Bureau also agreed to purchase certain products sourced by First Supply and Second Supply for a period of 15 years from November 5, 1994 at prices acceptable to all parties with a first right of refusal to First Supply and Second Supply. F-25 CHINA RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except share and per share data) 14. 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 warehouse, factories, and other industrial and office facilities of Hainan Agricultural, First Supply and Second Supply are located and to provide certain related services to Hainan Agricultural. In consideration for this, the Farming Bureau is entitled to an annual service fee to a maximum of RMB5,000, calculated at 10% of Hainan Agricultural's annual consolidated net income before the service fee as determined in accordance with US GAAP, provided that the annual consolidated net income exceeds RMB40,000 after deducting such service fee. The agreement was terminated with effect from January 1, 1997. For the year ended December 31, 1996, RMB5,000, being the maximum amount under the agreement, was paid to the Farming Bureau. For the year ended December 31, 1995, no service fee was paid as the above-mentioned condition was not met. (d) Management fee income from Jin Long and Jin Huan For the years ended December 31, 1995 and 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 14(e) below, no such services were provided to Jin Long and Jin Huan and accordingly, no management fee was received in 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 Hainan Agricultural, First Supply and Second Supply (collectively, the "Operating Subsidiaries") were restructured effective from October 1, 1996. The Restructuring has resulted in the simplification of corporate structure by consolidating the operations of several trading and servicing divisions and the transfer of certain assets, liabilities, including certain amounts due from the Farms and other related companies of the Farming Bureau, and surplus employees to the Farming Bureau, a 39% shareholder of Hainan Agricultural. In addition, as part of the Restructuring, bank loans of the Operating Subsidiaries 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-26 CHINA RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except share and per share data) 14. RELATED PARTY BALANCES AND TRANSACTIONS (continued) (e) Restructuring of operations (continued) Pursuant to an Asset and Staff Transfer Agreement (the "Transfer Agreement"), the value of the assets and liabilities transferred was determined based on their fair value at the effective date of transfer as determined by a professional independent valuer in the PRC. Based on their valuation, there were no material differences between the fair value 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 value of assets/liabilities of the Operating Subsidiaries that were transferred to the Farming Bureau in 1996 and 1997 are as follows:
1996 1997 RMB RMB Trade receivables 92,553 - Other receivables, prepayments and other current assets 42,665 - Inventories 27,986 - Amounts due from related companies 274,046 - Fixed assets 15,821 - Investments 1,961 - Amounts due to related companies (127,458) - Accounts payable (61,689) - Other payables and accrued liabilities (37,935) - 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) =======
The net credit was applied against the receivable 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 owned and/or controlled by the Farming Bureau have become interest-free. Starting from October 1, 1996, interest expense on bank loans of the Group have been borne by the Farming Bureau until the effective transfer of the bank loans to the Farming Bureau in March 1997. F-27 CHINA RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except share and per share data) 14. RELATED PARTY BALANCES AND TRANSACTIONS (continued) (f) Consultancy fees Pursuant to a mandate letter dated February 1, 1994, which was amended on November 1, 1994, between Billion Luck and Brender Services Limited ("Brender"), a shareholder of the Company, Billion Luck agreed to pay Brender consultancy fees of HK$80 (RMB89) per month and pursuant to a revised consulting agreement dated April 30, 1995, Brender agreed to provide accountancy and consulting services to the Company for a period of 5 years commencing on May 1, 1995. In consideration of the services to be rendered, the monthly consultancy 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. (g) 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 12 to the consolidated financial statements. (h) Loan from the Farming Bureau On March 25, 1996, Hainan Agricultural entered into a loan agreement with the Farming Bureau by which Hainan Agricultural borrowed RMB35,868. The loan is unsecured, interest-free and it is expected to be repaid by conversion of the loan into registered capital of Hainan Agricultural upon the approval for such conversion by relevant government authorities. On December 31, 1996, a supplementary agreement was entered into between Hainan Agricultural and the Farming Bureau to apply the loan to set off the balance due from the Farming Bureau to Hainan Agricultural against any amounts due to Hainan Agricultural and its subsidiaries in 1996. F-28 CHINA RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except share and per share data) 15. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Year ended December 31, 1995 1996 1997 RMB RMB RMB Cash paid during the year for: Interest expenses 49,963 28,258 2,178 Income tax 307 7,193 4,486 ======= ======= ======= Non-cash investing and financing activities: Series A preferred stock issued for conversion of long term loans from shareholders 53,930 - - Conversion of 1,653 shares of series B convertible preferred stock to 4,579,052 shares of common stock - 383 - Exchange of 6,400,000 shares of Series A preferred stock for 3,200,000 shares of Restricted Common Stock - 53,930 - Exchange of 3,200,000 shares of Restricted Common Stock for 3,200,000 shares of Series B preferred stock - 270 - Transfer of assets and liabilities to the Farming Bureau pursuant to the Restructuring (note 14(e)), net - 227,950 292,560 Acquisition of an investment (note 10(b)) - - 140,000 Disposal of an investment (note 10(b)) - - 5,000 ======= ======= =======
F-29 CHINA RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands except share and per share data) 16. CONCENTRATION OF RISK Concentration of credit risk: Financial instruments that potentially subject the Group to significant concentration of credit risk consist principally of cash deposits, trade receivables and amounts due from the Farming Bureau and related companies. (i) Cash deposits The Group places its cash deposits with an international bank and various PRC State-owned financial institutions. (ii) Trade receivables The Group sells to customers located throughout the PRC. Concentration of credit risk with respect to trade receivables is limited due to the large number of entities comprising the Group's customer base. The Group carefully assesses the financial strength of its customers and generally does not require collateral. (iii) Amounts due from the Farming Bureau and related companies The Farming Bureau has guaranteed the recoverability of all the amounts due from related companies, all of which are State-owned entities owned and/or controlled by the Farming Bureau. The Farming Bureau is a division of the Ministry of Agriculture of the PRC. 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. F-30 CHINA RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except share and per share data) 16. CONCENTRATION OF RISK (continued) The Group is dependent on the Farming Bureau for providing substantially all of the supply of natural rubber. While Hainan Agricultural, First Supply and Second Supply have entered into an agreement with the Farming Bureau which requires the Farming Bureau to prioritize allocation of natural rubber in favor of First Supply and Second Supply (the "Operating Subsidiaries"), there can be no assurances that this agreement will result in continued allocations of satisfactory supplies of natural rubber. Additionally, the Operating Subsidiaries are dependent upon the Farming Bureau to purchase a significant portion of the materials and supplies sold by the Operating Subsidiaries in their current procurement operations. Although the Group and the Farming Bureau have entered into a long-term sale and purchase agreement dated November 5, 1994 (the "Sale and Purchase Agreement"), which requires the Farming Bureau to purchase on a priority basis from the Operating Subsidiaries the types of materials and supplies currently procured for it, there can be no assurances that the Farming Bureau will actually purchase such materials or supplies or that market terms will be sufficient to allow the Operating Subsidiaries to sell any such materials or supplies to the Farming Bureau on terms which are profitable to the Company. The Sale and Purchase Agreement has a 15 year term; however, its enforceability in the PRC would be subject to broad discretion and interpretive powers of the courts and equitable terms which allow either party to terminate the agreement if the other materially defaults. Damages for actual losses may be awarded to the non-defaulting party. Currently, a large proportion of the Group's revenue comes from the sale of natural rubber and the procurement of materials and supplies in the PRC, which is vulnerable to the increase in the level of competition from overseas suppliers of natural rubber and the change in the supply and demand relationship with companies owned and/or controlled by the Farming Bureau. 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. Commodity futures contracts provide the Group 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 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. F-31 CHINA RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except share and per share data) 16. CONCENTRATION OF RISK (continued) Market risk resulting from a position in commodity futures contract 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 contract portfolio. 17. FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used by the Group in estimating its fair value disclosures for financial instruments: (i) Cash and cash equivalents The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents approximate their fair value. (ii) Amounts due to/from the Farming Bureau and related companies The carrying amounts are reasonable estimates of the fair values due to the short maturity of these assets and liabilities. (iii) Cost method investments It was not practicable to estimate the fair values of the Group's cost method investments in non-traded investments because of the lack of quoted market prices and the inability to estimate fair values without incurring excessive costs. The carrying amounts of RMB10,601 and RMB145,928 at December 31, 1996 and 1997, respectively, represent the Group's best estimates of current economic values of these investments. (iv) Short term bank loans The carrying amounts of the Group's short term bank loans approximate their fair values due to their short maturity. F-32 CHINA RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except share and per share data) 18. RESERVES AND DISTRIBUTION OF PROFITS The movements in reserves during the years are as follows:
Collective Surplus welfare reserve fund Total RMB RMB RMB Balance at December 31, 1994 1,328 1,329 2,657 Appropriation for the year 3,137 3,136 6,273 ------- ------- ------- 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 ======= ======= =======
In accordance with the relevant PRC regulations and the articles of association of Hainan Agricultural (the "Articles of Association"), appropriations representing 10% of the net income as reflected in its statutory financial statements will be allocated to each of surplus reserve and collective welfare fund. Subject to certain restrictions set out in the relevant PRC regulations and the Articles of Association, the surplus reserve may be distributed to Billion Luck, the Farming Bureau and Guilinyang State Farm in the form of share bonus issues. 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, 1995, 1996 and 1997 that are available for distribution are RMB27,844, RMB62,951 and RMB86,448, respectively. F-33 CHINA RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except share and per share data) 19. COMMITMENTS AND CONTINGENCIES (a) Lease commitments At December 31, 1997, future minimum payments under operating leases for the leasing of buildings in Hainan, the PRC from the Farming Bureau and companies controlled by the Farming Bureau were as follows: RMB Payable in: 1998 242 1999 242 2000 242 2001 170 2002 170 Thereafter 298 ----- Total minimum lease payments 1,364 ===== Rental expenses under operating leases for the years ended December 31, 1995, 1996 and 1997 amounted to RMB170, RMB188 and RMB242, respectively. (b) 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 (1996: RMB30,497). 20. FOREIGN CURRENCY EXCHANGE The Renminbi ("RMB") is not freely convertible into foreign currencies. Effective from January 1, 1994, a single rate of exchange is quoted daily by the People's Bank of China (the "Unified Exchange Rate"). However, the unification of the exchange rates does not imply convertibility of RMB into United States dollars ("US$") or other foreign currencies. All foreign exchange transactions continue to take place either through the Bank of China or other banks authorized to buy and sell foreign currencies at the exchange rates quoted by the People's Bank of China. Approval of foreign currency payments by the Bank of China or other institutions requires submitting a payment application form together with suppliers' invoices, shipping documents and signed contracts. The Unified Exchange Rates at December 31, 1995, 1996 and 1997 were US$1 : RMB8.32, US$1 : RMB8.30 and US$1 : RMB8.28, respectively. F-34 CHINA RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except share and per share data) 21. RETIREMENT BENEFITS As stipulated by the PRC regulations, First Supply and Second Supply participate in a defined contribution retirement plan (the "Retirement Plan") administered by a State-owned insurance company controlled by the Farming Bureau. First Supply and Second Supply are required to make contributions to the Retirement Plan at a rate of 21% of the aggregate of basic salaries, allowances and bonus of its existing staff. All staff of First Supply and Second Supply are covered under the Retirement Plan and upon retirement, the retired staff are entitled to a monthly pension payment borne by the above-mentioned insurance company under the Retirement Plan. First Supply and Second Supply are not responsible for any payments beyond the contributions to the Retirement Plan as noted above. The amounts of contributions paid by First Supply and Second Supply, which were charged to the consolidated statements of income, amounted to RMB1,591, RMB1,588 and RMB368 for the years ended December 31, 1995, 1996 and 1997, respectively. As detailed in note 14(e), the Farming Bureau has arranged with an insurance company controlled by it to transfer the retirement plan of those employees that were transferred to the Farming Bureau under the Restructuring. F-35 CHINA RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except share and per share data) 22. SEGMENT FINANCIAL INFORMATION The Group is principally engaged in the distribution of natural rubber and the procurement of materials, supplies and other agricultural products in the PRC. The Group did not engage in any export sales during the years ended December 31, 1995, 1996 and 1997. Business segment Reportable information on the Group's segments are as follows:
Year ended December 31, 1995 1996 1997 RMB RMB RMB Net sales: Distribution of natural rubber: Net sales to unaffiliated customers 1,776,641 1,519,060 858,211 Net sales to affiliates 1,630 - 245,934 --------- --------- --------- 1,778,271 1,519,060 1,104,145 --------- --------- --------- Procurement of materials, supplies and other agricultural products: Net sales to unaffiliated customers 72,880 102,745 12,909 Net sales to affiliates 106,092 205,694 32,117 --------- --------- --------- 178,972 308,439 45,026 --------- --------- --------- Total net sales 1,957,243 1,827,499 1,149,171 ========= ========= ========= Operating income: Distribution of natural rubber 47,188 40,460 17,672 Procurement of materials, supplies and other agricultural products 1,607 57,682 4,164 ------- ------- ------- Total operating income 48,795 98,142 21,836 ======= ======= =======
F-36 CHINA RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in thousands, except share and per share data) 22. SEGMENT FINANCIAL INFORMATION (continued)
Business segment (continued) Year ended December 31, 1995 1996 1997 RMB RMB RMB Depreciation: Distribution of natural rubber 2,562 1,066 1,373 Procurement of materials, supplies and other agricultural products 258 747 56 ------- ------- ------- Total depreciation expenses 2,820 1,813 1,429 ======= ======= ======= Capital expenditure: Distribution of natural rubber - - 2,884 Procurement of materials, supplies and other agricultural products 4,275 2,663 - ------- ------- ------- Total capital expenditure 4,275 2,663 2,884 ======= ======= ======= December 31, 1995 1996 1997 RMB RMB RMB Identifiable assets: Distribution of natural rubber 423,701 542,005 203,015 Procurement of materials, supplies and other agricultural products 231,748 151,458 87,916 ------- ------- ------- Total identifiable assets 655,449 693,463 290,931 Investments 11,963 10,601 145,928 Goodwill 1,076 1,049 1,021 ------- ------- ------- Total assets 668,488 705,113 437,880 ======= ======= =======
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 (1995 and 1996 : Nil). F-37 EXHIBITS -88- EXHIBITS INDEX -------------- Exhibit No. ----------- 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.) -89- 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.) -90- 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.) 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.) 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 herewith.) 10.39 Stock Purchase Agreement, by and between HARC and Guilinyang Farm, dated December 29, 1997. (Certified English translation of original Chinese version filed herewith.) 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 herewith.) 11.3 Computation of Earnings Per Share for Fiscal Year ended December 31, 1997 ( Contained in Financial Statements filed herewith.) 21 Subsidiaries of the Registrant (Contained in Financial Statements 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 30, 1997 (Filed with Schedule 14A dated December 20, 1997, and incorporated herein by reference.) EX-10.38 2 CONSULTING AGREEMENT EXHIBIT 10.38 Consulting Agreement between the Registrant and Brender Services Limited, dated December 29, 1997 BRENDER SERVICES LIMITED (Incorporated in British Virgin Islands with limited liability) Room 2005, 20/F., Universal Trade Center, 3 Arbuthnot Road, Central, Hong Kong Telephone: (852)28106226 Facsimile: (852)28106963 April 30, 1997 China Resources Development, Inc. 23/F., Office Tower, Convention Plaza, 1 Harbour Road, Wanchai, Hong Kong Attn: Mr Li Shunxing Dear Mr. Li This letter serves to inform you that the initial period covered by the Consulting Agreement dated April 30, 1995 (the "Agreement") shall be expiring on May 1, 1997. We therefore propose to renew the Agreement for another three-year period under the following terms: Monthly consulting fee commencing May 1, 1997 HK$270,000 All other terms of the Agreement shall remain unchange. During the past two years, we have assumed extra duties and obligations besides the regular accounting services as provided by the original Agreement which include: (1) Coordination of all marketing and public relations activities for the Company which include review all press announcements, design, update and review the Company's corporate brochures, the worldwide web site, attending telephone conference with analyst, potential investors, shareholders and our public relations counsel, and responding to shareholders' inquiries. Because of the different time zone between Hong Kong and the States, most of the telephone communication with the U.S. analysts, investors etc. have to be conducted at late evening Hong Kong time; (2) Drafting, reviewing and translating of various agreements and confirmations for the purpose of the completion of the group audited financial statements and annual report; (3) Advising and coordinating with the legal counsel with regard to matters concerning annual shareholders meeting, capital structure and certain material transaction undertaken by the Company; (4) Advising and coordinating with various acquisition plans of the Company; and (5) Handling and coordinating of all administrative works with regard to the conversion of shares by the shareholders; (6) Serving as the principal coordinator between the Company and the SEC and NASD concerning all the on-going compliance requirements of the Company; (7) Coordinating all the administrative works between the Company and its Hainan subsidiaries. The works include explaining and advising to the Hainan colleagues on matters concerning the rules and regulations of the States. Most of these duties are not within the scope of the original Agreement and these additional duties had put additional burden and workload to the Company. As a result, we may need to employ additional resources and manpower to cater for these extra services. Kindly signify your agreement to the above by signing and returning to us the duplicate of this letter. Yours sincerely, Edward Wong Director cc: I.P.Zhang, Director and Corporate Secretary Bell Tam , Director and Chief Financial Officer Agreed and accepted by: For and on behalf of China Resources Development, Inc. /S/ Li Shunxing - --------------- President Dated this day of , 1997. -------- ---------------- EX-10.39 3 STOCK PURCHASE AGREEMENT EXHIBIT 10.39 Stock Purchase Agreement, by and between HARC and Guilinyang Farm, dated December 29, 1997 (Certified English translation of original Chinese version) The undersigned officer of China Resources Development, Inc., hereby represents that the following is a fair and accurate English translation of the original Chinese version of the Stock Purchase Agreement, by and between HARC and Guilinyang Farm, dated December 29, 1997. /s/ Wong Wah On ------------------------------------- Wong Wah On, Financial Controller STOCK PURCHASE AGREEMENT by and between HAINAN GUILINYANG STATE FARM AND HAINAN ZHONGWEI AGRICULTURAL RESOURCES CO., LTD. with respect to 28,000,000 Legal Person Shares, representing 5.3% of the total issued and outstanding share capital of HAINAN SUNDIRO MOTORCYCLE COMPANY LTD. This Stock Purchase Agreement is made and entered into by and between :- (1) Hainan Guilinyang State Farm (the "Seller") with its registered office situated at Lingshan, Qiongshan City, Hainan Province 571100. Mr. Lin Shiluan as its legal representative; and (2) Hainan Zhongwei Agricultural Resources Co., Ltd. (the "Purchaser") with its registered office situated at 6th Floor, Hongyun International Hotel, No. 13 Haixiu Street, Haikou City, Hainan Province 570206. Mr. Wang Faren as its legal representative. WHEREAS the Seller owns 142,464,000 Legal Person Shares of Haina Sundiro Motorcycle Company Ltd. ("Sundiro") and desires to sell and the Purchaser desires to purchase part of such stock. WHEREBY it is now agreed as follows:- ARTICLE I SALE OF SHARES 1.1 The Seller agrees to sell to the Purchaser, and the Purchaser agrees to purchase from the Seller Legal Person Shares owned by the Seller and all of the rights and interests of the Seller therein and thereto at the Effective Date of this Agreement on terms and subject to the conditions set forth in this Agreement. 1.2 The Seller owns 142,464,000 Legal Person Shares of the Company. The number of shares to be sold to the Purchaser (the "Shares") is Twenty Eight Million (28,000,000) Legal Person Shares, par value RMB1 per share, which constitutes approximately 5.3% of the total issued and outstanding share capital of the Company. ARTICLE II PURCHASE CONSIDERATION 2.1 The total purchase consideration for the Shares under this Agreement is Renminbi Yuan One Hundred and Forty Million (RMB140,000,000) (the "Purchase Consideration"). 2.2 The Purchase Consideration shall become payable to an account designated by the Seller within 30 days after the completion of the registration of transfer of shares in the Shenzhen Stock Exchange Registration Company Ltd. (the "Registration Company"). 2.3 The Seller shall give a notice to the Purchaser within 15 days after the completion of registration of transfer of shares as set forth in Article 2.2, designating its account for the payment of the Purchase Consideration by the Purchaser. 2.4 Notwithstanding any other provisions of this Agreement, at any time before the Purchaser makes payment of the Purchase Consideration, the Purchaser shall be entitled to set off part or total Purchase Consideration with any amount due or not, owed by the Seller to the Purchaser. Upon the issuing of notice of such set-off by the Purchaser to the Seller, the set-off shall take effect whereby the Purchaser shall be released from payment of the Purchase Consideration and the Seller shall be released from its debt to the Purchaser within the amount being set off. ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE SELLER The Seller is hereby represents and warrants to the Purchaser as follows: 3.1 The Seller is a legal person duly organized and validly existing under the laws of the People's Republic of China. The Seller has full corporate power and authority to execute and deliver this Agreement and to perform its obligations hereunder. 3.2 The Company is listed on the Shenzhen Stock Exchange and as of the date of this Agreement, its listing status has not been terminated, withdrawn, suspended or restricted. 3.3 The Shares are duly authorized, validly issued, outstanding, fully paid and nonassessable. The Seller owns the Shares free and clear of all liens, security interests, pledges or encumbrances of any kind. 3.4 The execution and delivery by the Seller of this Agreement do not and the performance by the Seller of its obligations under this Agreement will not: (a) conflict with or result in a violation or breach of any of the certificate or articles of assoication or other comparable corporate charter documents of the Seller or the Company; (b) conflict with or result in a violation, default or breach, as applicable, of any law, rule, regulation, order, writ, judgment, injunction, decree, determination or award or contract or agreement applicable to the Seller or the Company or any of their respective assets and properties. 3.5 The total number of shares of the Company owned by the Seller shall not be below 142,464,000 shares and be in conformity with the representations and warranties made in Article 3.3 herein from the Effective Date of this Agreement to the completion of registration of transfer of Shares with the Registration Company. 3.6 The Seller shall disclose all information to its knowledge about the Company which may cause the price of the Shares to move down at the Effective Date of this Agreement other than information already made available and accessible to the public. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE PURCHASER The Purchaser hereby represents and warrants to the Purchaser as follows: 4.1 The Purchaser is a legal person duly organized and validly existing under the laws of the People's Republic of China . The Purchaser has full corporate power and authority to execute and deliver this Contract and to perform its obligations hereunder. 4.2 The execution and delivery by the Purchaser of this Agreement do not and the performance by the Purchaser of its obligations under this Agreement will not: (a) conflict with or result in a violation or breach of any of the certificate or articles of incorporation or other comparable corporate charter documents of the Purchaser or the Company; (b) conflict with or result in a violation, default or breach, as applicable, of any law, rule, regulation, order, writ, judgment, injunction, decree, determination or award or contract or agreement applicable to the er or the Company or any of their respective assets and properties. ARTICLE V EFFECTIVENESS OF THE AGREEMENT 5.1 This Agreement shall become binding and effective upon execution by both the Seller and the Purchaser ("Effective Date"). 5.2 Before the Effective Date of this Agreement, any rights and interests related to the Shares shall be enjoyed by and, any obligations and liabilities related to the Shares be undertaken by, the Seller. 5.3 The Seller agrees to assist the Purchaser to procure the formal ownership of the Shares so as to enjoy all rights and interests and to undertake all obligations and liabilities as a shareholder of the Company through the completion of the registration of transfer in the Registration Company. 5.4 After the Effective Date of this Agreement, any rights and interests related to the Shares shall be enjoyed by and any obligations and liabilities shall be undertaken by the Purchaser except obligations or liabilities arising out of any negligence or fault of the Seller before the completion of registration which shall be undertaken by the Seller. 5.5 From the Effective Date of this Agreement to the completion of registration of transfer: (1) unless under the written instruction of the Purchaser otherwise, the Seller shall take all necessary actions to exercise the rights entitled under the Shares including rights to receive bonus stock, dividend and stock issue through capitalization of reserves, rights to participate in all right issues and their subsequent transfer and listing of Shares and all other rights and shall not waive any of the rights and interests entitled by the Shares, for and on the benefit of the Purchaser. The Seller shall give at least three (3) days advance notice to the Purchaser before it takes any of the aforesaid action. Any expenses and costs incurred in relation to the aforesaid action shall be borne by the Purchaser and paid by the Seller in advance. (2) Any of the liabilities incurred other than the liabilities undertaken by the Purchaser in accordance with 5.4 (1) herein shall be undertaken by the Seller. ARTICLE VI REPORT, PUBLIC ANNOUNCEMENT AND REGISTRATION 6.1 The sale of Shares under this Agreement shall be reported in writing to the Company, Shenzhen Stock Exchange, Securities Administration Office of Hainan Province and China Securities Supervision Commission. 6.2 Both parties hereto shall make public announcement separately in one of the newspapers published nationwide and designated by the China Securities Supervision Commission according to the Standard promulgated by the China Securities Supervision Commission. Each party shall pay its own expenses related to such announcement. 6.3 Both parties hereto shall make registration of transfer in the Registration Company jointly within Fifteen (15) days from the Effective Date of this Agreement. The parties shall tender the following documents to the Registration Company: (1) identification certificate of person in charge of application for registration (2) power of attorney of each party (3) this Stock Purchase Agreement (4) other necessary documents for the registration. Each party shall pay its own expenses related to such action. ARTICLE VII MISCELLANEOUS 7.1 This Agreement supersedes all prior discussion and agreements between the parties hereto with respect to the subject matter hereof and contain the sole and entire agreement between the parties hereto with respect to the subject matter hereof. 7.2 The applicable law of this Agreement is the laws of the People's Republic of China. 7.3 The heading used in this Agreement have been inserted for convenience of reference only and do not define or limit the provision hereof. 7.4 This Agreement may be executed in any number of identical counterparts, each of which will be deemed an original, but all of which together will constitute one and the same instrument. Dated this 29th day of December, 1997 The Seller: Hainan Guilinyang State Farm By: /s/Lin Shiluan --------------------------------------- Lin Shiluan The Purchaser: Hainan Zhongwei Agricultural Resources Co., Ltd. By: /s/Han Jianzhun ---------------------------------------- Han Jianzhun EX-10.40 4 AGREEMENT FOR THE SALE EXHIBIT 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) The undersigned officer of China Resources Development, Inc., hereby represents that the following is a fair and accurate English translation of the original Chinese version of the Agreement for the Sale and Purchase of Share in Hainan Zongya Aluminum Company Ltd., dated December 29, 1997, by and between First Supply and Guilinyang Farm. /s/ Wong Wah On ---------------------------------------- Wong Wah On, Financial Controller AGREEMENT FOR THE SALE AND PURCHASE OF SHARE IN HAINAN ZHONGYA ALUMINUM COMPANY LTD. This Agreement is made and entered into by and between: (1) First Goods and Materials Supply and Sales Corporation (the "Seller") with its registered office situated at No.57 Haixiu Road, Haikou City, Hainan Province with Mr. Chen Yu Xiong as its legal representative; and (2) Hainan Guilinyang State Farm (the "Purchaser") with its registered office situated at Lingshan, Qiongshan City, Hainan Province 571100 with Mr. Lin Shiluan as its legal representative. WHEREAS the Seller owns 6.03% of the total registered capital of Hainan Zhongya Aluminum Company Ltd. (the "Company") and desires to sell and the Purchaser desires to purchase all of such registered capital. NOW IT IS HEREBY AGREED AS FOLLOWS:- ARTICLE I SALE AND PURCHASE Upon and subject to the terms and conditions of this Agreement, the Seller shall sell and the Purchaser shall purchase 6.03% of the total issued and outstanding stock of the Company (the "Sale Shares") held by the Seller with all rights attached thereto as from Effective Date of this Agreement. ARTICLE II PURCHASE PRICE The total consideration for the sale and purchase of the Sale Shares shall be Renminbi Yuan Seven Million (RMB7,000,000) (the "Purchase Price"), of which, RMB5,000,000 shall represent the consideration for sale and purchase of the Sale Shares and the remaining RMB2,000,000 shall represent the consideration for the transfer by the Seller of an accounts receivable from the Company, amounting RMB2,000,000, to the Purchaser. The total consideration shall be payable within one month upon the execution of this Agreement. ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE SELLER The Seller hereby represents and warrants to the Purchaser as follows: 3.1 The Seller is a legal person duly organized and validly existing under the laws of the People's Republic of China. The Seller has full corporate power and authority to execute and deliver this Agreement and to perform its obligations hereunder. 3.2 The execution and delivery by the Seller of this Agreement and the performance by the Seller of its obligations hereunder, has been duly and validly authorized, no other internal action on the part of the Seller or its stockholders (or its higher authorities) is necessary. This Agreement has been duly and validly executed and delivered by the seller and constitutes a legal, valid and binding obligation of the Seller enforceable against the Seller in accordance with its terms. 3.3 The Sale Shares are duly authorized, validly issued, outstanding, fully paid and nonassessable. The Seller owns the Shares free and clear of all liens, security interests, pledges or encumbrances of any kind. 3.4 The execution and deliver by the Seller of this Agreement do not and the performance by the Seller of its obligations under this Agreement will not: (a) conflict with or result in a violation or breach of any of the certificate or articles of association or other comparable corporate charter documents of the Seller or the Company; (b) conflict with or result in a violation, default or breach, as applicable, of any law, rule, regulation, order, writ, judgment, injunction, decree, determination or award or contract or agreement applicable to the Seller or the Company or any of their respective assets and properties. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE PURCHASER The Purchaser hereby represents and warrants to the Purchaser as follows: 4.1 The Purchaser is a legal person duly organized and validly existing under the laws of the People's Republic of China. The Seller has full corporate power and authority to execute and deliver this Contract and to perform its obligations hereunder. 4.2 The execution and delivery by the Purchaser of this Agreement and the performance by the Purchaser of its obligations hereunder, has been duly and validly authorized. This Agreement has been duly and validly executed and delivered by the Purchaser and constitutes a legal, valid and binding obligation of the Purchaser enforceable against the Purchaser in accordance with its terms. 4.3 The execution and deliver by the Purchaser of this Agreement do not and the performance by the Purchaser of its obligations under this Agreement will not: (a) conflict with or result in a violation or breach of any of the certificate or articles of association or other comparable corporate charter documents of the Purchaser or the Company; (b) conflict with or result in a violation, default or breach, as applicable, of any law, rule, regulation, order, writ, judgment, injunction, decree, determination or award or contract or agreement applicable to the Purchaser or the Company or any of their respective assets and properties. ARTICLE V EFFECTIVENESS OF THE AGREEMENT 5.1 This Agreement shall be binding and effective upon execution by both the Seller and the Purchaser. 5.2 The Purchaser shall be entitled to the ownership of the Shares and enjoy rights and interests and undertake obligations and liabilities as a shareholder of the Company upon the completion of the registration of transfer in the Registration Company. 5.3 After the Effective Date of this Agreement, any rights and interests related to the Sale Shares shall be enjoyed by and any obligations and liabilities related to the Sale Shares be undertaken by the Purchaser. ARTICLE VI APPROVAL The sale of Sale Shares under this Agreement shall be approved by the Board of Directors of the Company and be subject to all necessary approval of the relevant government authorities. ARTICLE VII MISCELLANEOUS 7.1 This Agreement supersedes all prior discussion and agreements between the parties hereto with respect to the subject matter hereof and contain the sole and entire agreement between the parties hereto with respect to the subject matter hereof. 7.2 The applicable law of this Agreement is the laws of the People's Republic of China. 7.3 The heading used in this Agreement have been inserted for convenience of reference only and do not define or limit the provision hereof. 7.4 This Agreement may be executed in any number of identical counterparts, each of which will be deemed an original, but all of which together will constitute one and the same instrument. Dated this 29th day of December, 1997 The Purchaser: Hainan Guilinyang State Farm By: /s/Lin Shiluan ------------------------------------ Lin Shiluan The Seller: First Goods and Materials Supply and Sales Corporation By: /s/Chen Yu Xiong ------------------------------------- Chen Yu Xiong EX-27 5 FDS
5 This schedule contains summary financial information extracted from the Form 10-K report of China Resources Development, Inc. for the year ended December 31, 1997 and is qualified in its entirety by reference to such report. 1,000 RENMINBI YUAN 12-Mos DEC-31-1997 JAN-01-1997 DEC-31-1997 8.28 124,547 0 11,249 0 61,792 281,692 11,866 4,370 437,880 63,765 0 0 27 50 240,895 437,880 1,149,171 1,194,600 1,092,972 1,092,972 34,060 0 15,007 52,561 9,798 42,763 0 0 0 18,200 3.05 3.04
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