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, 2001
CHINA RESOURCES DEVELOPMENT, INC.
------------------------------------------------------
(Exact name of Registrant as specified in its Charter)
Nevada 0-26046 87-02623643
---------------------------- -------------------- ------------------
(State or other jurisdiction (Commission File No.) (IRS Employer
of incorporation) Identification No.)
Room 2105, West Tower, Shun Tak Centre,
200 Connaught Road C., Sheung Wan, Hong Kong
Telephone: 011-852-2810-7205
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(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 pursuant to
Item 405 of Regulation S-K (Section 229.405) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]
State the aggregate market value of the voting stock held by
non-affiliates of the registrant computed by reference to the price at which the
stock was sold, or the average bid and asked prices of such stock, as of a
specified date within 60 days prior to the date of filing. (See definition of
affiliate in Rule 405, 17 CFR 230.405.): $1,221,000 as of March 7, 2002.
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. 837,823 shares of
Common Stock, $.001 par value (as of March 29, 2002).
DOCUMENTS INCORPORATED BY REFERENCE: None.
CONVENTIONS
Unless otherwise specified, all references in this report to "U.S.
Dollars," "Dollars," "US$," 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 its 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, 2001, 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, 2001, which was US$1.00 = HK$7.80.
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. All per share references to Common Stock
have been adjusted to give effect to a one-for-ten reverse split on December 31,
1996, and a one-for-ten reverse split on June 11, 1999.
References to "Company" are to China Resources Development, Inc., and
include, unless the context requires otherwise, the operations of its
subsidiaries (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 State Farms" are to the rubber farms in Hainan
controlled by the Farming Bureau.
References to "Hainan Weilin" are to Hainan Weilin Timber Limited
Liability Company, a limited liability company organized in the PRC, whose
capital was owned 58% by HARC. On April 30, 2001, HARC disposed of its 58%
interest in Hainan Weilin to the Farming Bureau.
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References to "HARC" are to Hainan Cihui Industrial Company Limited
(formerly known as Hainan Zhongwei Agricultural Resources Company Limited), a
Sino-foreign joint stock company organized in the PRC, and is a wholly-owned
subsidiary of the Company. The Company, through Billion Luck, acquired the
remaining 39% interest in HARC from the Farming Bureau on April 30, 2001.
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 "Medi-China" are to Zhongwei Medi-China.com Limited, a
Hong Kong company and a wholly-owned subsidiary of Silver Moon
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
the Company, and the Assets and Staff Transfer Agreement among HARC, First
Supply, Second Supply, Sales Centre and the Farming Bureau, both of which were
effective as of January 1, 2000.
References to "Sales Centre" are to Rubber Sales Centre, a company
organized in the PRC and a wholly-owned subsidiary of HARC.
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 320,000 shares are outstanding.
References to "Silver Moon" are to Silver Moon Technologies Limited, a
British Virgin Islands company, whose capital is 80% owned by the Company.
References to "Zhongwei Trading" are to Hainan Zhongwei Trading Company
Limited, a company organized in the PRC, whose capital is owned 95% by HARC and
5% by Billion Luck.
References to "Zhuhai Zhongwei" are to Zhuhai Zhongwei Development
Company Limited, a company organized in the PRC and a wholly-owned subsidiary of
HARC.
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
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expectations of the Company, its directors or its officers with respect to the
Company's policies regarding investments, dispositions, financings, conflicts of
interest and other matters; and 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 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 108,000 shares of the Company's Common Stock. As a
result of the acquisition, the former shareholders of Billion Luck acquired 90%
of the issued and outstanding shares of the then outstanding Common Stock of the
Company, and the Company became the owner of all the outstanding shares of
capital stock of Billion Luck.
Billion Luck was incorporated in the British Virgin Islands on December
14, 1993. HARC was established in Hainan Province, the People's Republic of
China, by Billion Luck, Guilinyang Farm, and the Farming Bureau. Pursuant to an
approval document dated March 16, 1997, issued by the Hainan Provincial
Securities Management Office, the name of HARC was changed from "Hainan
Agricultural Resources Company Limited" to "Hainan Zhongwei Agricultural
Resources Company Limited." Pursuant to another approval document dated October
9, 2001, the name of HARC was changed to "Hainan Cihui Industrial Company
Limited."
HARC is a Chinese company incorporated on June 28, 1994, with a
registered capital of Rmb100 million (US$12.08 million). Billion Luck made a
cash contribution of Rmb56 million (US$6.76 million) to purchase a 56% interest
in HARC. The remaining interests in HARC were acquired by Guilinyang Farm (5%)
for a cash contribution of Rmb5 million (US$0.60 million) and by the Farming
Bureau (39%) through the contribution of its interests in two of its
subsidiaries, First Supply and Second Supply, which were valued at Rmb39 million
(US$4.71 million). Pursuant to an agreement dated January 31, 1994, between
Billion Luck, Guilinyang Farm, and the Farming Bureau, the parties thereto
agreed to establish HARC to act as the holding company of First Supply and
Second Supply. Pursuant to an Agreement for the Sale and Purchase of Share in
HARC dated April 30, 1998 between Guilinyang Farm and the Company, the Company
purchased 5,000,000 shares, representing 5% of the total issued and outstanding
share capital of HARC, from Guilinyang Farm for consideration of Rmb7 million
(US$0.85 million). On April 30, 2001, Billion Luck, through its nominees,
acquired the remaining 39% equity interest in HARC from the Farming Bureau for
total consideration of Rmb129.4 million (US$15.6 million). Following the
acquisitions, HARC became an indirect wholly-owned subsidiary of the Company.
Before January 1, 2000, the Company's two primary businesses were the
marketing and distribution of natural rubber and the procurement of production
materials, supplies and other agricultural products. The Company, through HARC,
First Supply and Second Supply, purchased natural rubber produced by the Hainan
State Farms and sold the natural rubber to customers throughout the PRC, such as
tire manufacturers, rubber processing plants, and import and export companies.
As part of its risk management strategy, the Company, through HARC, First Supply
and Second Supply, entered into commodity futures contracts to hedge against the
exposure to price risk associated with existing inventories and certain firm
commitments for the purchase of natural rubber. The Company also entered into
natural rubber commodity futures contracts that were 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, First Supply and Second Supply procured, 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. Pursuant to
a Shareholders' Agreement on Business Restructuring dated March 3, 2000 among
the Company, Billion Luck and the Farming Bureau, the natural rubber
distribution business and the procurement of materials and supplies business of
HARC, First Supply and Second Supply ceased effective as of January 1, 2000. The
performance of natural rubber distribution and the materials and supplies
procurement business had been declining since 1998. Management believed that the
poor operating environment for these businesses would persist for the
foreseeable future. Management therefore determined that it was in the best
interest of the Company to cease the operations of these two businesses. The
cessation was expected to reduce selling and administrative expenses and improve
operating and management efficiency, allowing management to focus on exploring
other investment opportunities.
-5-
Zhongwei Trading was incorporated on September 28, 1998, with a
registered capital of Rmb5 million (US$0.60 million). Zhongwei Trading is owned
95% by HARC and 5% by Billion Luck. Since its commencement of operation in 1999,
Zhongwei Trading has invested in the marketable securities in the China Stock
Market as short-term investments. As opportunities arise, Zhongwei Trading may
expand its trading to include other products.
Zhuhai Zhongwei, was incorporated on May 18, 1999, with a registered
capital of Rmb6 million (US$0.72 million). Zhuhai Zhongwei is a wholly-owned
subsidiary of HARC and is principally engaged in the operation of a supermarket
in Zhuhai, PRC, which sells food and daily products.
Hainan Weilin, incorporated on June 22, 1999 with a registered capital
of Rmb8.56 million (US$1.03 million), was principally engaged in the sale of
processed timber wooden blocks. Hainan Weilin was owned 58% by HARC. On April
30, 2001, HARC disposed of its 58% interest in Hainan Weilin to the Farming
Bureau for a consideration of Rmb3.8 million (US$0.46 million).
Silver Moon is a British Virgin Islands company incorporated on March
24, 2000. The principal business of Silver Moon and its wholly-owned subsidiary,
Medi-China (formerly known as Sky Creation Technology Limited), a Hong Kong
company incorporated on October 15, 1999, is to provide online Internet
healthcare content, through its website, medi-china.com, which offers
health-related content in both English and Chinese, with a focus on Chinese
herbal medicine and therapies. On June 30, 2000, the Company acquired an 80%
equity interest in Silver Moon for total consideration of US$1.5 million through
the issuance of 244,897 shares of unregistered restricted common stock to Silver
Moon's former sole equity owner, E-link Investment Limited. The number of shares
issued was based upon a per share price of US$6.125, which was the closing bid
price of the Company's common stock as quoted on the Nasdaq SmallCap Market on
June 29, 2000. In March 2001, E-link Investment Limited sold its equity position
in the Company to Anka Capital Ltd., a corporation related to the Company
through common directors (see "Directors and Executive Officers of the
Registrant"). For the years ended December 31, 2000 and 2001, neither Silver
Moon nor Medi-China has contributed to the Company's revenues.
The following chart illustrates the equity ownership by percentage of
each of the Company's principal operating subsidiaries as of December 31, 2001:
--------------------------------
| CHINA RESOURCES |
-----| DEVELOPMENT, INC., |--------------------------|
| | a Nevada corporation | |
| -------------------------------- |
| | |
| | |
| 100% 80%
| -------------------------------- ------------------------
| | BILLION LUCK | | SILVER MOON, |
| | COMPANY LTD., |-----------| | a British Virgin |
| | a British Virgin Islands | | | Islands company |
| | company | | ------------------------
| -------------------------------- | |
| | | |
| 95% | 100%
| -------------------------------- | ------------------------
| | HAINAN CIHUI INDUSTRIAL- | | | MEDI-CHINA, |
| 5% | COMPANY. LTD. ("HARC"), | | | a Hong Kong company |
|----|- a PRC company | | ------------------------
-------------------------------- |
| | |
100%| | 95% |
--------------------- ------------------- |
| ZHUHAI | |ZHONGWEI TRADING,| 5%|
| ZHONGWEI, | | a PRC company |----|
| a PRC company | -------------------
---------------------
ORGANIZATIONAL AND MANAGEMENT STRUCTURE OF HARC
During the first quarter of 2000, HARC undertook a restructuring plan,
including cessation of the operations of its two primary businesses, the
marketing and distribution of natural rubber and the procurement of production
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materials, supplies and other agricultural products, which were originally
conducted through its subsidiaries, First Supply, Second Supply and Sales
Centre. Under the restructuring plan, the operations of First Supply, Second
Supply and Sales Centre ceased and the assets, liabilities and staff related
thereto were conveyed to the Farming Bureau, effective as of January 1, 2000.
The purchase price was the book value or the fair value of the net assets
transferred, as determined by an independent valuer, as of December 31, 1999,
whichever was lower. After the restructuring plan, First Supply, Second Supply
and Sales Centre became dormant.
In connection with the restructuring, HARC established several new
lines of businesses, including supermarket operations (through Zhuhai Zhongwei)
and the sale of processed timber wooden blocks (through Hainan Weilin). However,
the scale of operation of the new businesses remained relatively small in 2000
and 2001. In light of economic conditions, lack of productivity and unprofitable
operations, the Company ceased timber processing operations in connection with
the disposition of its 58% interest in Hainan Weilin to the Farming Bureau on
April 30, 2001.
HARC has a two-tier structure, consisting of a board of directors and a
supervisory committee. 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). The board of directors is also responsible for exploring business
opportunities and making investment decisions. The supervisory committee is
responsible for supervising the board of directors and the senior management of
HARC in order to prevent the abuse of rights and infringement of the interests
of HARC and its shareholders and employees. Among other responsibilities,
members of the supervisory board attend meetings of the board of directors and
observe HARC's managers to ensure that their acts do not contravene any laws or
regulations or HARC's articles of association or the resolutions of HARC's
shareholders in meetings thereof. As of December 31, 2001, the board of
directors and the supervisory board were made up of 5 and 3 members,
respectively.
As of December 31, 2001, the Company's only active operations consisted
of its supermarket business.
INDUSTRY SEGMENTS
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). For the year ended December 31, 1999, the
Company had two main reportable segments, marketing and distribution of natural
rubber and the procurement of production material, supplies and other
agricultural products businesses, ceased as of January 1, 2000. The reportable
segments for the year ended December 31, 2000 were supermarket operations and
sale of processed timber, the latter of which ceased as of April 30, 2001.
Notwithstanding the cessation of natural rubber operations in early 2000, during
the year ended December 31, 2001, the Company engaged in trading of natural
rubber occasionally, depending on market conditions. See Financial Statements
and Notes included therein attached as Appendix A hereto.
Year Ended December 31,
--------------------------------------------------------------------------------------------
1999 2000 2001 2001
-------- -------- -------- --------
(Rmb) (Rmb) (Rmb) (US$)
Net sales to external customers:
Natural rubber:
Net sales to unaffiliated customers 442,841 -- 4,093 494
-------- -------- -------- --------
442,841 -- 4,093 494
-------- -------- -------- --------
Materials, supplies and other
agricultural products:
Net sales to unaffiliated
customers 9,120 306 -- --
Net sales to affiliates 23,718 -- -- --
-------- -------- -------- --------
32,838 306 -- --
-------- -------- -------- --------
Supermarket operations:
Net sales to unaffiliated
customers 688 5,253 5,999 725
-------- -------- -------- --------
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Year Ended December 31,
--------------------------------------------------------------------------------------------
1999 2000 2001 2001
-------- -------- -------- --------
(Rmb) (Rmb) (Rmb) (US$)
688 5,253 5,999 725
-------- -------- -------- --------
Total consolidated net sales
476,367 5,559 10,092 1,219
======== ======== ======== ========
Depreciation and amortization
expenses:
Natural rubber 723 -- -- --
Materials, supplies and other
agricultural products 333 280 -- --
Supermarket operations 7 119 143 17
-------- -------- -------- --------
Total segment depreciation and
amortization expenses 1,063 399 143 17
Reconciling item:
Depreciation and amortization expenses
attributable to corporate assets 28 3,451 7,367 890
-------- -------- -------- --------
Total consolidated depreciation and 1,091 3,850 7,510 907
amortization expenses ======== ======== ======== ========
Segment profit/(loss):
Natural rubber 5,634 -- (157) (19)
Materials, supplies and other
agricultural product 3,040 10 -- --
Supermarket operations 32 453 417 50
-------- -------- -------- --------
Total segment profit/(loss) 8,706 463 260 31
Reconciling items:
Corporate expenses (14,971) (26,341) (31,307) (3,782)
Interest income 944 11,749 1,537 185
Interest expenses (1) (73) (229) (28)
-------- -------- -------- --------
Total consolidated loss before
income taxes and discontinue operations (5,322) (14,202) (29,739) (3,593)
======== ======== ======== ========
Segment assets:
Natural rubber 115,651 -- -- --
Materials, supplies and other
agricultural product 105,631 -- -- --
Supermarket operations 6,290 6,416 6,895 833
-------- -------- -------- --------
Total segment assets 227,572 6,416 6,895 833
Reconciling item:
Corporate assets 58,193 135,091 40,707 4,918
Investments 117,808 184,374 109,615 13,244
Intersegment receivables (26,477) -- -- --
Assets of discontinued timber segment -- 7,303 -- --
-------- -------- -------- --------
Total consolidated assets 377,096 333,184 157,217 18,995
======== ======== ======== ========
Expenditure for additions to
long-lived
assets:
Natural rubber -- -- -- --
Materials, supplies and other
agricultural products 54 -- -- --
Supermarket operations 4,223 387 79 9
-------- -------- -------- --------
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Year Ended December 31,
--------------------------------------------------------------------------------------------
1999 2000 2001 2001
-------- -------- -------- --------
(Rmb) (Rmb) (Rmb) (US$)
Total segment expenditure for
additions to
long-lived assets 4,277 387 79 9
Reconciling item:
Corporate assets 557 2,718 586 71
Discontinued timber segment 1,326 3,250 -- --
-------- -------- -------- --------
Total consolidated expenditure for 6,160 6,355 665 80
additions to long-lived assets ======== ======== ======== ========
SUPERMARKET OPERATIONS
The Company, through Zhuhai Zhongwei, has been engaged in the
supermarket operations since the fourth quarter of 1999. The supermarket which
Zhuhai Zhongwei operates is located in Zhuhai City of Guangdong Province. The
supermarket sells more than 10,000 consumer products to customers in the PRC.
Zhuhai Zhongwei maintains numerous suppliers for its sources of
consumer products, and no single supplier accounted for more than 10% of total
purchases of consumer products in 1999, 2000 and 2001. For the year ended
December 31, 2001, Zhuhai Zhongwei had approximately 130 suppliers which
supplied a wide variety of products, including fresh meat, fruits and grocery,
sanitary products, canned drink and food, snacks, frozen food, fast food,
cigarettes, phone cards, wine, etc. The value of total purchases of consumer
products was approximately Rmb571,000 (US$69,000), Rmb4.3 million (US$519,000)
and Rmb4.9 million (US$592,000) in 1999, 2000 and 2001, respectively. The top
five suppliers accounted for approximately 28%, 24% and 18% of total purchases
in 1999, 2000 and 2001, respectively. Zhuhai Zhongwei has not entered any
long-term purchase arrangement with any supplier. However, Zhuhai Zhongwei does
not anticipate that it will incur difficulties in the sourcing of its products.
All purchases were made locally in Renminbi on either a cash basis or open
account basis payable within 7 to 30 days.
Zhuhai Zhongwei targets the residents of Zhuhai City as its customers
and, due to the nature of retail business, no single customer accounted for more
than 5% of total revenues from the sales of consumer products in 1999, 2000 and
2001. All sales from the supermarket operations are paid in Renminbi, on a cash
basis.
The retailing business is not seasonal in nature, although a slightly
higher proportion of sales are recorded in summer when cold drinks and fresh
fruits are in larger demand.
Zhuhai Zhongwei faces severe competition in its supermarket operations.
There are several large chain supermarkets in Zhuhai City, all of which operate
in larger quarters and offer greater products choice. Accordingly, these
supermarkets generally offer competitive prices to their customers due to bulk
purchases and economy of scale. Zhuhai Zhongwei also faces competition from
convenience stores. As the supermarket which Zhuhai Zhongwei operates is located
in an upscale residential area where the residents seek higher quality products
and services, management believes that the competitive advantages of Zhuhai
Zhongwei rest on its ability to source high quality products and provide better
services.
As at December 31, 2001, Zhuhai Zhongwei had a total of 31 employees as
follows:
Accounting, administration and management 6
Purchasing and supplies 16
Cashier 4
Others 5
----
31
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PROCESSED TIMBER
The Company, through Hainan Weilin, engaged in the processing and sale
of timber with an annual production capacity of 5,000 cubic meters. The
processing factory operated from early 2000 through October 2000 at only one
third of its full capacity. Due to the high cost of production, in part due to
limited sources of supply of raw materials, and generally poor market condition,
the Company formally ceased processed timber operations following the
disposition of its 58% interest in Hainan Weilin to the Farming Bureau in April
2001.
INTERNET BUSINESS
The Company has entered information technology market through its
acquisition of an 80% equity interest in Silver Moon on June 30, 2000. The
principal business of Silver Moon, and its wholly-owned subsidiary, Medi-China,
is the provision of online Internet healthcare content, with a focus on Chinese
herbal medicine and therapies. In light of the global economic downturn and
pessimism towards the technology section for Internet related products and
services, management is aware that Silver Moon and Medi-China will have to wait
patiently for a full economic recovery. In view of the uncertainty lying ahead,
the Company has adopted a cautious and prudent approach to control costs and
minimize risks. Currently, the Company has no plan to put in extra resources to
the website, hoping to maintain only sufficient resources to ride through the
fragile economic situation, and to be ready to grasp potential opportunities
when the e-commerce industry stabilizes and demonstrates signs of revival.
PRC LEGAL SYSTEM
Since 1979, many laws and regulations addressing economic matters in
general have been promulgated in the PRC. Despite development of its legal
system, the PRC does not have a comprehensive system of laws. In addition,
enforcement of existing laws may be uncertain and sporadic, and implementation
and interpretation thereof inconsistent. The PRC judiciary is relatively
inexperienced in enforcing the laws that exist, leading to a higher than usual
degree of uncertainty as to the outcome of any litigation. Even where adequate
law exists in the PRC, it may be difficult to obtain swift and equitable
enforcement of such law, or to obtain enforcement of a judgment by a court of
another jurisdiction. The PRC's legal system is based on written statutes and,
therefore, decided legal cases are without binding legal effect, although they
are often followed by judges as guidance. The interpretation of PRC laws may be
subject to policy changes reflecting domestic political changes. As the PRC
legal system develops, the promulgation of new laws, changes to existing laws
and the pre-emption of local regulations by national laws may adversely affect
foreign investors. The trend of legislation over the past 20 years has, however,
significantly enhanced the protection afforded foreign investors in enterprises
in the PRC. However, there can be no assurance that changes in such legislation
or interpretation thereof will not have an adverse effect upon the business
operations or prospects of the Company.
The activities of the Company's principal 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. In
particular, the realization of the Company's future investment plans in China
will also be subject to PRC government approvals.
[Item 2] PROPERTIES
The Company's administrative offices, supermarket, timber processing
factory and other facilities of HARC and its principal subsidiaries are located
in Hong Kong, Hainan, Zhuhai and Shenzhen in the PRC.
Pursuant to an office sharing agreement dated September 1, 2000, the
Company's head office in Hong Kong is shared on an equal basis between the
Company and Anka Consultants Limited, a private Hong Kong company which is owned
by certain directors of the Company. The lease is for a period of 2 years from
September 1, 2000 to
-10-
August 31, 2002. The total area of the office is approximately 230 square
meters. For the years ended December 31, 2000 and 2001, the Company paid rental
expenses to Anka Consultants Limited amounted to HK$46,000 (US$6,000) and
HK$276,000 (US$35,000), respectively. The office sharing agreement also provides
that the Company share certain costs and expenses in connection with its use of
the office.
In 1994, the Farming Bureau entered into a rental agreement with HARC
with respect to the rental of a portion consisting of 532 square meters of a
building in Hainan, in which HARC's offices were located. Such rental agreement
was for a period of 10 years at an annual rental of Rmb170,240 (US$20,560)
payable in equal semi-annual installments. On July 1, 2001, pursuant to mutual
agreement, both parties agreed to terminate the rental agreement. On May 30,
2001, a rental agreement was entered into between HARC and Haikou Nanyang
Building Co. Ltd., an unaffiliated third party, with respect to the rental of
office space in Hainan with a total gross area of 138 square meters. The rental
agreement is for a period of 1 year from June 4, 2001 to June 3, 2002 at a
monthly rental of Rmb4,131 (US$499). HARC plans to renew the lease for another
year upon its termination in June 2002.
The structure and building in respect of the supermarket which the
Company operates is owned by Zhuhai Zhongwei, the Company's wholly-owned
subsidiary, with a total gross area of 720 square meters. The structure and
building in respect of the timber processing business was rented by Hainan
Weilin from Haikou Mechanical Factory for a period of 1 year ended on November
1, 2000 with a total gross area of 7,000 square meters at an annual rental of
Rmb400,000 (US$48,000).
HARC also maintains a branch office in Shenzhen with a total gross area
of 708 square meters. The rental agreement is for a period of 8 years from
December 1, 1999 to December 1, 2007 at an annual rental of Rmb509,540
(US$61,538).
[Item 3] LEGAL PROCEEDINGS
There are no legal proceedings pending or threatened against the
Company or any of its subsidiaries as of December 31, 2001.
[Item 4] SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS
On December 12, 2001, the Company held its annual meeting of
shareholders, at which a quorum of shares held of record on October 31, 2001
were present in person or represented by proxy, and the following proposals by
the Board of Directors were approved by the holders of a majority of the
outstanding shares of the Company:
1. the election of Ching Lung Po and Ng Kin Sing to serve as directors in
Class II (1,034,812 votes for, 1,138 abstentions); and
2. the ratification of the appointment of Ernst & Young as the Company's
independent accountants for the fiscal year ending December 31, 2001
(1,035,503 votes for, 417 votes against, 30 abstentions).
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. Since August 7, 1995, the
Company's Common Stock has traded on The Nasdaq Stock Market under the symbol
"CHRB." Prior to such date, the Company's Common
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Stock was traded in the over-the-counter market on the OTC 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 2000 and 2001.
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 Bloomberg Business News, and the quotations
have been adjusted to give retroactive effect to the one-for-ten reverse stock
split that was effective as of June 11, 1999:
Period High Bid Low Bid
------ -------- -------
2000 Fiscal Year, quarter ended:
March 31, 2000..................... $10.1 $7.2
June 30, 2000...................... 17.8 3.9
September 30, 2000................. 6.4 4.8
December 31, 2000.................. 4.8 2.6
2001 Fiscal Year, quarter ended:
March 31, 2001..................... $3.84 $2.38
June 30, 2001...................... 3.15 2.51
September 30, 2001................. 3.71 2.55
December 31, 2001.................. 3.00 2.15
On March 29, 2002, there were 300 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 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 HARC'S board of directors based upon HARC's business performance
and development needs, subject to the approval of HARC's shareholders. In
addition to the foregoing, any future determination to pay a dividend to holders
of shares of Common Stock will depend on the Company's results of operations,
its financial condition and other factors deemed relevant by the Board of
Directors. Since the acquisition of Billion Luck by the Company in December
1994, the Company has not received any distributions from any of its
subsidiaries and has not made any distributions to its shareholders.
[Item 6] SELECTED FINANCIAL DATA
The following table sets forth selected financial data of the Company
and its subsidiaries. The selected historical consolidated financial data in the
table for the Company's five fiscal years ended December 31, 1997, 1998, 1999,
2000 and 2001, are derived from the consolidated financial statements elsewhere
herein. The data should be read in conjunction with, and are qualified in their
entirety by reference to, "Management's Discussion and Analysis of Results of
Operations and Financial Condition", the Consolidated Financial Statements of
the Company and related Notes thereto, and other financial information contained
elsewhere herein.
-12-
-------------------------------------------------------------------------------------
In Thousands, Except Per Share Amounts
Year Ended December 31,
1997 1998 1999 2000 2001 2001
(Rmb) (Rmb) (Rmb) (Rmb) (Rmb) (US$)
---------- ---------- ---------- ---------- ---------- ----------
INCOME STATEMENT DATA
Net sales 1,149,171 527,692 476,367 5,559 10,092 1,219
Cost of sales (1,092,972) (510,631) (468,021) (5,096) (9,832) (1,188)
---------- ---------- ---------- ---------- ---------- ----------
Gross Profit 56,199 17,061 8,346 463 260 31
Depreciation (1,429) (1,343) (1,085) (942) (815) (98)
Amortization -- -- -- (2,841) (6,628) (801)
Provision for doubtful -- (4,740) -- -- -- --
accounts
Loss on impairment of an
investment -- (49,969) -- -- -- --
Loss on disposition of -- -- -- -- (16,001) (1,933)
assets
Selling, general and
administrative expenses (32,934) (35,419) (23,785) (18,608) (15,219) (1,839)
Financial income, net 145 6,590 864 7,871 1,318 159
Other income/(expenses), net 30,580 4,070 10,338 (145) 7,346 888
---------- ---------- ---------- ---------- ---------- ----------
Income/(loss) from
continued operations before 52,561 (63,750) (5,322) (14,202) (29,739) (3,593)
income taxes
Income taxes (9,798) -- -- (2,887) (1,579) (191)
---------- ---------- ---------- ---------- ---------- ----------
Income/(loss) from
continued operations before
minority interests 42,763 (63,750) (5,322) (17,089) (31,318) (3,784)
Minority interests (24,563) 11,079 (1,674) (4,634) 1,198 145
---------- ---------- ---------- ---------- ---------- ----------
Income/(loss) from
continued operations 18,200 (52,671) (6,996) (21,723) (30,120) (3,639)
Discontinued operations:
Loss on continuing
operations of
discontinued timber
segment -- -- -- (1,477) (24) (3)
---------- ---------- ---------- ---------- ---------- ----------
Net income/(loss) 18,200 (52,671) (6,996) (23,200) (30,144) (3,642)
========== ========== ========== ========== ========== ==========
Earnings/(loss) per share*
Basic
Continuing operations 30.55 (87.91) (11.80) (30.37) (35.95) (4.35)
Discontinue operations -- -- -- (2.06) (0.03) --
---------- ---------- ---------- ---------- ---------- ----------
30.55 (87.91) (11.80) (32.43) (35.98) (4.35)
========== ========== ========== ========== ========== ==========
Diluted
Continuing operations 30.46 (87.91) (11.80) (30.37) (35.95) (4.35)
Discontinue operations -- -- -- (2.06) (0.03) --
---------- ---------- ---------- ---------- ---------- ----------
30.46 (87.91) (11.80) (32.43) (35.98) (4.35)
========== ========== ========== ========== ========== ==========
OTHER FINANCIAL DATA
Income/(loss) before income
taxes, minority
interests, loss
on continuing operations
of discontinued timber
segment, depreciation
and amortization 53,990 (62,407) (4,231) (10,352) (22,229) (2,686)
========== ========== ========== ========== ========== ==========
BALANCE SHEET DATA
Current assets 281,692 243,188 248,052 127,646 35,636 4,306
Working capital 217,927 167,851 162,789 79,634 18,000 2,175
Total assets 437,880 370,726 377,096 333,184 157,217 18,995
Current liabilities 63,765 75,337 85,263 48,012 17,636 2,131
Minority interests 133,143 107,945 111,399 115,480 -- --
Total liabilities and
minority interests 196,908 183,282 196,662 163,492 17,636 2,131
Shareholders' equity 240,972 187,444 180,434 169,692 139,581 16,864
* The computation of diluted earnings/(loss) per share did not assume the
conversion of the stock option because their inclusion would have been
antidulutive.
-13-
[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, through HARC, First Supply and Second Supply, previously
engaged in marketing and distribution of natural rubber and rubber products
produced by the Hainan State Farms and non-state farms in the PRC, procurement
of production materials and supplies, including chemicals, farm equipment and
machinery, automobiles and other commodities for use primarily by the Hainan
State Farms and other unaffiliated customers, and trading in natural rubber
commodity futures contracts. Pursuant to a Shareholders' Agreement on Business
Restructuring dated March 3, 2000, among the Company, Billion Luck and the
Farming Bureau, the natural rubber distribution business and the procurement of
materials and supplies business ceased effective as of January 1, 2000. Pursuant
to an Assets and Staff Transfer Agreement dated March 3, 2000, among the Farming
Bureau, HARC, First Supply, Second Supply and Sales Centre, the assets,
liabilities and staff related to the ceased businesses were transferred to the
Farming Bureau effective as of January 1, 2000. The restructuring resulted in
the discontinuation of substantially all of the existing operations of the
Company as of December 31, 1999. In the fourth quarter of 1999 and the first
quarter of 2000, the Company undertook several new lines of businesses as part
of the restructuring, including its new supermarket operations and the processed
timber operation. On April 30, 2001, the Company, through its nominees, acquired
a 39% equity interest in its 61%-owned subsidiary, HARC, from the Farming
Bureau. Following the acquisition, HARC became an indirect wholly-owned
subsidiary of the Company. Concurrent with the acquisition, HARC entered into
several agreements with the Farming Bureau to dispose of certain assets,
including its 58% interest in Hainan Weilin. Thereafter, the Company formally
ceased its timber processing operation. Because of the restructuring undertaken
and the acquisition and disposition of assets by the Company, operating results
of prior years are not indicative of the operating results that may be expected
in future years.
The Statements under "Results of Operations" and "Liquidity and Capital
Resources" relate to the operations and financial condition of the Company and
its subsidiaries.
RESULTS OF OPERATIONS
The following table shows the selected consolidated income statement
data of the Company and its subsidiaries for each of the three fiscal years
ended December 31, 1999, 2000 and 2001. The data should be read in conjunction
with, and qualified in their entirety by reference to, the Consolidated
Financial Statements of the Company and related Notes thereto and other
financial information included elsewhere therein:
-14-
Year Ended December 31,
(In thousands) 1999 2000 2001 2001
(Rmb) (Rmb) (Rmb) (US$)
-------- -------- -------- --------
Net sales:
Natural rubber 442,841 -- 4,093 494
Materials and supplies and
other agricultural products 32,838 306 -- --
Supermarket operations 688 5,253 5,999 725
-------- -------- -------- --------
476,367 5,559 10,092 1,219
Gross profit 8,346 463 260 31
Gross profit margin 1.8% 8.3% 2.6% 2.6%
Loss from continuing operations before income
taxes (5,322) (14,202) (29,739) (3,593)
Income taxes -- (2,887) (1,579) (191)
-------- -------- -------- --------
Loss from continuing operations before minority (5,322) (17,089) (31,318) (3,784)
interests (1,674) (4,634) 1,198 145
Minority interests -- -- -- --
Loss from continuing operations (6,996) (21,723) (30,120) (3,639)
Discontinued operations:
Loss on continuing operations of discontinued -- (1,477) (24) (3)
timber segment -- -- -- --
Net loss (6,996) (23,200) (30,144) (3,642)
======== ======== ======== ========
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000
SALES AND GROSS PROFIT- NATURAL RUBBER
Notwithstanding the cessation of natural rubber operations in early
2000, from time-to-time the Company engages in the trading of natural rubber,
depending upon management's evaluation of market conditions. The Company had
sales of Rmb4.1 million (US$494,000) and gross loss of Rmb157,000 (US$19,000) on
natural rubber operations in 2001. As a result of a decline in the natural
rubber market in the second half of 2001, the Company sold all of its rubber
inventories in late 2001, and a loss was recorded.
SALES AND GROSS PROFIT- MATERIALS, SUPPLIES AND OTHER AGRICULTURAL PRODUCTS
Procurement and sales of materials, supplies and other agricultural
products were discontinued effective January 1, 2000. Sales of materials and
supplies in 2000 represented the sales of old inventories as of December 31,
1999.
SALES AND GROSS PROFIT- SUPERMARKET OPERATIONS
Net sales from supermarket operations increased by 14.2% from Rmb5.3
million (US$634,000) for the year ended December 31, 2000 to Rmb6.0 million
(US$725,000) for the year ended December 31, 2001. For the year ended December
31, 2000, supermarket operations had gross profit and gross profit margin of
Rmb0.5 million (US$55,000) and 8.6%, respectively. For the year ended December
31, 2001, supermarket operations had gross profit and gross profit margin of
Rmb0.4 million (US$50,000) and 6.9%, respectively. The increase in net sales
were due to increased sales volume resulting from the successful marketing
efforts of the Company.
SALES AND GROSS PROFIT- PROCESSED TIMBER (DISCONTINUED OPERATIONS)
The timber processing factory had been operated from early 2000 through
October 2000 at one third of its
-15-
full capacity. Due to the high cost of production, as a result of limited
sources of supply of raw materials, and the poor market condition, the Company
decided to formally cease processed timber operations in 2001. The sale of
processed timber had a gross loss of Rmb503,000 (US$61,000) or 36.1% on sales
for the year ended December 31, 2000.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling and administrative expenses decreased by Rmb3.4 million
(US$410,000) or 18.3% to Rmb15.2 million (US$1.8million) in 2001 from Rmb18.5
million (US$2.3 million) in 2000. The decrease was mainly due to a reduction of
salary and rental expenses in HARC resulting from the relocation to a smaller
office in mid-2001 and the reduction of headcounts.
FINANCIAL INCOME, NET
Net financial income decreased from Rmb7.9 million (US$951,000) in 2000
to Rmb1.3 million (US$157,000) in 2001. The significant decrease was mainly
attributable to interest income earned of Rmb11 million (US$1.3 million) in 2000
from a short term loan granted to an unaffiliated third party. The interest
income was partly offset by a realized currency exchange loss amounted to Rmb3.8
million (US$459,000), arising from the conversion of Renminbi to Hong Kong
dollars. The decrease in interest income earned in 2001 was mainly due to the
decrease in cash and cash equivalents.
OTHER INCOME/(EXPENSES), NET
Net other income/(expenses) increased by Rmb7.5 million (US$905,000) to
net income of Rmb7.3 million (US$888,000) in 2001 from net expenses of
Rmb145,000 (US$18,000) in 2000. Net other income in 2001 mainly consisted of a
net gain on trading of marketable securities of Rmb7.1 million (US$852,000) and
a premium earned on written call option of Rmb3.2 million (US$384,000), which
was partly offset by the write off of acquired website technology of Rmb2.9
million (US$350,000). Net other expenses in 2000 included the net gain on
trading of marketable securities of Rmb1.5 million (US$183,000) and loss on
disposal of property and equipment of Rmb1 million (US$121,000).
INCOME TAXES
It is management's intention to reinvest all the income attributable to
the Company earned by its operations outside the US. Accordingly, no US federal
and state income taxes have been provided in these consolidated financial
statements.
Income taxes consist of PRC federal income tax computed at 15% on
assessable income for foreign investment enterprises operating in Hainan.
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
SALES AND GROSS PROFIT- MATERIALS, SUPPLIES AND OTHER AGRICULTURAL PRODUCTS
Procurement and sales of materials, supplies and other agricultural
products were discontinued effective January 1, 2000. Sales of materials and
supplies in 2000 represented the sales of old inventories as of December 31,
1999.
SALES AND GROSS PROFIT- SUPERMARKET OPERATIONS
The significant increase in sales was mainly due to the supermarket
operations commenced during the fourth quarter of 1999. There was a full year
operations in 2000. Supermarket operations had gross profit and gross profit
margin of Rmb0.5 million (US$55,000) and 8.6%, respectively, for the year ended
December 31, 2000.
-16-
SALES AND GROSS PROFIT- PROCESSED TIMBER
Processed timber operations were set up in early 2000 and, therefore,
there was no sales in 1999. The sale of processed timber had a gross loss of
Rmb503,000 (US$61,000) or 36.1% on sales for the year ended December 31, 2000,
as the processing factory was only operated at one-third of its full capacity
during 2000.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling and administrative expenses decreased by Rmb5.2 million
(US$633,000) or 22.0% to Rmb18.5 million (US$2.2 million) in 2000 from Rmb23.8
million (US$2.9 million) in 1999. The decrease was mainly due to the reduction
of sales activities in 2000.
FINANCIAL INCOME, NET
Net financial income increased from Rmb864,000 (US$104,000) in 1999 to
Rmb7.9 million (US$951,000) in 2000. The significant increase was mainly
attributable to interest income earned of Rmb11 million (US$1.3 million) in 2000
from a short term loan granted to an unaffiliated third party. The interest
income was partly offset by a realized currency exchange loss amounted to Rmb3.8
million (US$459,000), arising from the conversion of Renminbi to Hong Kong
dollars.
OTHER INCOME/(EXPENSES), NET
Other income decreased by Rmb10.5 million (US$1.3 million) to net
expenses of Rmb145,000 (US$18,000) in 2000 from net income of Rmb10.3 million
(US$1.2 million) in 1999. Other income in 1999 represented the recovery of a
margin deposit paid to a future broker of Rmb3 million (US$362,000) which was
provided for in 1998, dividend income from the Company's long-term investment
that amounted to Rmb6.7 million (US$809,000) and a net gain on trading of
marketable securities. Net expenses in 2000 mainly represented the net gain on
trading of marketable securities of Rmb1.5 million (US$183,000) and loss on
disposal of property and equipment of Rmb1 million (US$121,000).
INCOME TAXES
It is management's intention to reinvest all the income attributable to
the Company earned by its operations outside the US. Accordingly, no US federal
and state income taxes have been provided in these consolidated financial
statements.
Income taxes consist of PRC federal income tax computed at 15% on
assessable income for foreign investment enterprises operating in Hainan.
SIGNIFICANT ACCOUNTING POLICIES
Our financial statements reflect the selection and application of
accounting policies which require management to make significant estimates and
assumptions. We believe that the following are some of the more significant
judgment areas in the application of our accounting policies that currently
affect our financial condition and results of operations.
IMPAIRMENT OF INTANGIBLE ASSETS
Whenever events or changes in circumstances indicate that the carrying
values of our intangible assets may be impaired, management performs an analysis
to determine the recoverability of the asset's carrying value. Intangible assets
consisted of acquired website technology which was amortized on the
straight-line basis over two years. Management's analysis indicated that the
carrying value of the acquired website technology was not recoverable from
future cash flows. The Company therefore wrote off the balance of unamortized
acquired website technology of Rmb2,936,000 (US$355,000) as of December 31, 2001
to the statement of operations.
-17-
DEFERRED TAX ASSETS
The Company is required to assess the ultimate realization of deferred
tax assets generated from net operating loss carryforwards. This assessment
takes into consideration of the availability and character of future taxable
income. As management estimates that there will be no taxable income generated
for the foreseeable future, no deferred tax assets are recognized in the
financial statements.
REVENUE RECOGNITION
Revenue from product sales is recognized at the point of sale for
retail sales and upon the delivery of goods for other sales, when all
performance obligations have been completed and is reasonably assured
collectibility. Rental income is recognized on the straight-line basis over the
lease terms. Dividend income is recognized upon the establishment of the right
to receive such payment.
LIQUIDITY AND CAPITAL RESOURCES
The Company's and its subsidiaries' primary liquidity needs are to fund
inventories and operating expenses, and to expand business operations. The
Company has financed its working capital requirements through internally
generated cash and advances from a former vice president.
Net cash provided by/(used in) operating activities was (Rmb42 million)
(US$5.1 million), Rmb2.6 million (US$314,000) and Rmb12 million (US$1.4 million)
in fiscal 1999, 2000 and 2001, respectively. Net cash flows from the Company's
operating activities are attributable to the Company's income and changes in
operating assets and liabilities, Net cash provided by operating activities in
2001 included approximately Rmb57 million (US$6.9 million) of cash proceeds from
the disposal of marketable securities.
The Company had a working capital surplus of approximately Rmb18
million (US$2.2 million) as of December 31, 2001, compared to that of
approximately of Rmb79 million (US$9.6 million) as of December 31, 2000. The
decrease was mainly attributable to the Company paying approximately Rmb36
million (US$4.3 million) cash and foregoing approximately Rmb14 million (US$1.7
million) in receivables due from the Farming Bureau as partial consideration for
the minority interest of HARC. Net cash used in investing activities in 2001
mainly attributable to the consideration paid for the minority interest of HARC
as stated above and Rmb22 million (US$2.6 million) loans advanced to third
parties, of which Rmb6 million (US$725,000) was repaid before December 31, 2001.
Except as disclosed above, there have been no significant change in the
financial condition and liquidity during the year. The Company believes that
internally generated funds will be sufficient to satisfy its anticipated working
capital needs for at least the next 12 months.
FACTORS RELATING TO FORWARD-LOOKING STATEMENTS
Factors that could cause our actual results of operations to differ
materially from those contained in forward looking statements include the
following:
-18-
RISKS ASSOCIATED WITH FOREIGN OPERATIONS
o Our principal subsidiaries operate in the People's Republic of China,
and are, by law, subject to administrative review by various national,
provincial and local agencies of the Chinese government - governmental
oversight and/or changes to existing rules and regulations could
adversely affect our results of operations.
o The Company's operations and financial results could be adversely
affected by economic conditions and changes in the policies of the PRC
government, such as changes in laws and regulations (or the
interpretation thereof), including measures which may be introduced to
regulate or stimulate the rate of economic growth. The rate of
deflation of the PRC economy, based on published consumer price
information, was 2.6 percent for 1998, 3.0 percent for 1999 and 0.4
percent for 2000. The PRC government has taken certain measures to
stimulate domestic demand and consumption. There can be no assurance
that these measures will be successful.
o All of the Company's sales and purchases are made domestically and are
denominated in Renminbi. Accordingly, the Company and its subsidiaries
do not have material market risk with respect to currency fluctuation.
As the reporting currency of the Company's consolidated financial
statements is also Renminbi, there is no significant translation
difference arising on consolidation. However, the Company may suffer
exchange loss when it converts Renminbi to other currencies, such as
Hong Kong dollars or United States dollars.
o The Company's interest income is sensitive to changes in the general
level of Renminbi and Hong Kong dollars interest rates. In this regard,
changes in interest rates affect the interest earned on the Company's
cash equivalents. As of December 31, 2001, the Company's cash
equivalents are mainly Renminbi and Hong Kong Dollar deposits with
financial institutions, bearing market interest rates without fixed
term.
o While we are a Nevada corporation, our officers and directors are
non-residents of the United States, our assets are located in the PRC
and our operations are conducted in the PRC; therefore, it may not be
possible to effect service of process on such persons in the United
States, and it may be difficult to enforce any judgments rendered
against us or such persons.
GENERAL RISKS OF OPERATIONS
o We have discontinued many of our operations and we are currently
dependent upon the success of one line of business - our supermarket
operations; while our supermarket operations generate operating
revenues, those revenues are not sufficient to offset expenses,
resulting in continued losses from operations.
o Unless we are able to reduce expenses, increase our profit margins
and/or acquire profitable operations, we will likely continue to incur
losses and investors in our shares may be unable to recoup their
investment.
o We intend to investigate and evaluate potential acquisition candidates;
however, we may be unable to acquire business operations that prove to
be profitable; we will continue to incur administrative and
professional expenses in connection with our evaluation and acquisition
of business operations, without corresponding revenues from those
operations prior to acquisition.
o As of December 31, 2001, the Company had short-term investments in
marketable securities in the Hong Kong stock market and Nasdaq market
with a total market value of Rmb5.7 million (US$694,000). These
investments expose the Company to market risks that may cause the
future value of these investments to be lower than the original cost of
such investments at the time of purchase.
o The market for our common stock is not active and the limited trading
volume in our shares could result in substantial market volatility in
the price for our shares.
o Our supermarket operations face competition from larger, more
capitalized companies than ours and we may be unable to compete
successfully.
-19-
o We do not intend to pay dividends for the foreseeable future - we
intend to reinvest earnings from operations, if any, back into our
operations.
QUARTERLY RESULTS OF OPERATIONS
The following is a summary of the quarterly results of operations for
the years ended December 31, 2001 and 2000. The following data was extracted
from the financial information contained in the Company's quarterly reports on
Form 10Qs. However, as the Company did not recognize the loss on disposition of
assets amounted to Rmb16 million (US$1.9 million) in the second quarter of 2001,
the Company will restate the quarterly results of operations by filing
amendments to the quarterly reports on Form 10Qs for the quarters ended June 30,
2001 and September 30, 2001.
--------------------------------------------------------------------------------------------
(In thousands, except share and March 31 June 30 September 30 December 31
per share data) (Rmb) (Rmb) (Rmb) (Rmb)
--------------------------------------------------------------------------------------------
2001:
Net sales 4,528 1,499 2,750 1,315
Cost of sales 4,199 1,149 2,483 2,001
Net income/(loss)
Income from continuing operations 5,138 (5,775) (7,026) (22,457)
Income from discontinued operations (24) -- -- --
------- ------- ------- -------
5,114 (5,775) (7,026) (22,457)
------- ------- ------- -------
Earnings/(loss) per common share:
Basic and diluted
Income from continuing operations 6.2 (6.9) (8.4) (26.8)
Income from discontinued operations (0.1) -- -- --
------- ------- ------- -------
6.1 (6.9) (8.4) (26.8)
------- ------- ------- -------
2000:
Net sales 1,397 2,316 1,445 1,796
Cost of sales 1,296 2,548 1,135 1,423
Net income/(loss)
Income from continuing operations 2,232 (1,876) (8,781) (14,066)
Income from discontinued operations (95) (308) (32) (274)
------- ------- ------- -------
2,137 (2,184) (8,813) (14,340)
------- ------- ------- -------
Earnings/(loss) per common share:
Basic and diluted
Income from continuing operations 3.8 (3.2) (10.8) (21.2)
Income from discontinued operations (0.2) (0.5) (0.1) (0.3)
------- ------- ------- -------
3.6 (3.7) (10.9) (21.5)
------- ------- ------- -------
The computation of diluted earnings/(loss) per share did not assume the
conversion of the stock options in 2001 and 2000 because their inclusion would
have been antidilutive.
[Item 8] FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Consolidated Financial Statements for the three fiscal
years ended December 31, 2001, 2000 and 1999 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.
-20-
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 29, 2001, and the ages of and positions with
the Company held by each of such persons:
Age Position
--- --------
Ching Lung Po 55 Chairman of the Board of Directors,
President and Chief Executive
Officer
Tam Cheuk Ho 39 Director and Chief Financial Officer
Wong Wah On 38 Director, Secretary and Financial
Controller
Wan Ying Lin 53 Director
Ng Kin Sing 40 Director
Lo Kin Cheung 37 Director
Mr. Ching Lung Po has been a director of the Company since February 4,
1998. He was appointed Chairman of the Board of Directors on January 25, 1999,
Chief Executive Officer and President of the Company on February 1, 1999 and
June 1, 1999, respectively. Mr. Ching has also 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 Chairman and Chief Executive Officer of Asia Fiber
Holdings Limited (OTC Bulletin Board: AFBR), which is included on the OTC
Bulletin Board operated by the Nasdaq, since January 2000 and June 2000,
respectively. Mr. Ching has been involved for more than 20 years in the
management of production and technology for industrial enterprises in PRC. He
worked in Heilongjiang Suihua Electronic Factory as an engineer from 1969 to
1976 and was the Head of the Heilongjiang Suihua Industrial Science & Technology
Research Institute from 1975 to 1976. Mr. Ching joined the Heilongjiang Qingan
Factory in 1976 and has been the General Manager since 1976. In 1988, Mr. Ching
started his own business and established the Shenzhen Hongda Science &
Technology Company Limited in Shenzhen, which manufactures electronic products.
Mr. Ching graduated from the Harbin Military and Engineering Institute and holds
the title of Senior Engineer.
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 a
fellow of both the Hong Kong Society of Accountants and 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. Tam is also a director of Anka Capital
Limited, a privately-held corporation, through which he is a principal
shareholder of the Company.
Mr. Wong Wah On has been a director of the Company since December 30,
1997. Mr. Wong is also the Financial Controller and Secretary of the Company. He
is responsible for assisting the Chief Financial Officer with the Company's
treasury, accounting and secretarial functions. From October 1992 through
December 1994, Mr.
-21-
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. Mr. Wong is also a director of Anka Capital Limited, a privately-held
corporation, through which he is a principal shareholder of the Company. He
received a professional diploma in Company Secretaryship and Administration from
the Hong Kong Polytechnic University. He is a fellow of both the Chartered
Association of Certified Accountants and the Hong Kong Society of Accountants,
and an associate of the Institute of Chartered Secretaries and Administrators.
He is also a certified public accountant in Hong Kong.
Mr. Wan Ying Lin has been a director of the Company since February 4,
1998, and also serves as a member of the Audit Committee. Mr. Wan graduated from
the Guangxi Liuzhou Institute of Medical Specialty specializing in
administration and management. From January 1986 through December 1987, he was
the manager of Lam Ko Mould Company in charge of the China marketing and
development division in Hong Kong. Then in January 1988 through February 1993,
he worked as the marketing manager of Wai Tong Trading Company in Hong Kong. In
1993, he joined the Hong Kong Prestressing Concrete Engineering Company Limited,
where he serves as manager.
Mr. Ng Kin Sing has been a director of the Company since February 1,
1999, and also serves as a member of the Audit Committee. From April 1998 to the
present, Mr. Ng has been the managing director of Action Plan Limited, a
securities investment company. From November 1995 until March 1998, Mr. Ng was
sales and dealing director for NatWest Markets (Asia) Limited; and from May 1985
until October 1996, he was the dealing director of BZW Asia Limited, an
international securities brokerage house. Mr. Ng holds a Bachelor's degree in
Business Administration from the Chinese University of Hong Kong.
Mr. Lo Kin Cheung has been a director of the Company since May 30,
2000, and also serves as a member of the Audit Committee. From September 2001 to
present, Mr. Lo has been the chief financial officer of Lee Fung - Asco Printers
Holdings Limited, a Hong Kong listed company, where he is responsible for the
overall corporate financial operations. From March 1998 to August 2001, Mr. Lo
was the executive director of Wiltec Holdings Limited, a Hong Kong listed
company, where he was responsible for corporate development and day-to-day
operations. From July 1986 until March 1998, Mr. Lo was the principal at Ernst &
Young, Hong Kong. He is a fellow of both the Hong Kong Society of Accountants
and the Chartered Association of Certified Accountants. He holds a Bachelor's
degree of Science from the University of Hong Kong.
At the annual meeting of shareholders on December 12, 2001, Messrs.
Ching Lung Po and Ng Kin Sing were elected to serve as Class II Directors until
the annual meeting to be held in 2004 and until their successors have been duly
elected and qualified. Messrs. Wan Ying Lin and Lo Kin Cheung serve in Class III
until the annual meeting to be held in 2002 and until their successors have been
duly elected and qualified; and Messrs. Tam Cheuk Ho and Wong Wah On serve in
Class I until the annual meeting to be held in 2003 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.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Based solely upon a review of Forms 3, 4 and 5 furnished to the Company
for the fiscal year ended December 31, 2001, the Company notes that director Lo
Kin Cheung filed a Form 3 on May 21, 2001 to report his status as a director,
which commenced on May 30, 2000; and that directors Tam Cheuk Ho and Wong Wah On
each filed a Form 4 on May 21, 2001 to report his indirect beneficial ownership
of the 244,897 shares of common stock acquired by Anka Capital Limited.
-22-
[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$)
-------------------------------------------------------------------------------------------------------------------
Ching Lung Po, President and 2001 276,923 -0- -0- 40,000 -0-
Chief Executive Officer
2000 276,923 -0- -0- -0- -0-
1999 253,846 -0- -0- -0- -0-
Tam Cheuk Ho, Director and 2001 230,769 -0- -0- 40,000 -0-
Chief Financial Officer
2000 230,769 -0- -0- 60 -0-
1999 212,538 -0- -0- 60 -0-
Wong Wah On, Director, 2001 153,846 -0- -0- 40,000 -0-
Secretary and Financial
Controller
2000 153,846 -0- -0- 60 -0-
1999 141,026 -0- -0- 60 -0-
===================================================================================================================
OPTION/SAR GRANTS IN LAST FISCAL YEAR
-------------------------------------------------------------------------------------------------------------------
Potential Realizable Value at Assumed
Annual Rates of Stock Price Appreciation
Individual Grants for Option Term
-----------------------------------------------------------------------------------------------
Number of % of Total
Securities Options
Underlying Granted to
Options Employees Exercise
Granted in Fiscal Price (2) Expiration
Name (#) (1) Year (1) (US$/Sh) Date 0% 5% 10%
---- -----------------------------------------------------------------------------------------------
Ching Lung Po 40,000 24.54% 2.95 06/15/04 -0- $18,600 $39,058
Tam Cheuk Ho 40,000 24.54% 2.95 06/15/04 -0- $18,600 $39,058
Wong Wah On 40,000 24.54% 2.95 06/15/04 -0- $18,600 $39,058
===================================================================================================================
(1) The Company has granted no Stock Appreciation Rights ("SARs"). For
information regarding stock options issued pursuant to the Company's Stock
Option Plan, see "Stock Options," hereinbelow.
(2) As of December 31, 2001, none of the stock options held by Mr. Ching, Mr.Tam
and Mr. Wong 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) of
the common stock on December 31, 2001, was US$2.78 per share.
On February 1, 1999, the Company entered into a Service Agreement with
Ching Lung Po. In accordance with the terms of the Service Agreement, Mr. Ching
has been employed by the Company as an Chief Executive Officer and to perform
such duties as the Board of Directors shall from time to time determine. Mr.
Ching shall receive a base salary of HK$2,160,000 (US$276,923) annually, which
base salary shall be adjusted on each anniversary of the Employment Agreement to
reflect a change in the applicable consumer price index or such greater amount
as the Company's Board of Directors may determine. The Employment Agreement has
a term of two years and shall be automatically renewed unless earlier terminated
as provided therein.
-23-
On February 1, 1999, the Company entered into an Employment Agreement
with Tam Cheuk Ho. In accordance with the terms of the Employment Agreement, Mr.
Tam has been employed by the Company as the Chief Financial Officer and to
perform such duties as the Board of Directors shall from time to time determine.
Mr. Tam shall receive a base salary of HK$1,800,000 (US$230,769) annually, which
base salary shall be adjusted on each anniversary of the Employment Agreement to
reflect a change in the applicable consumer price index or such greater amount
as the Company's Board of Directors may determine. The Employment Agreement has
a term of two years and shall be automatically renewed unless earlier terminated
as provided therein.
On February 1, 1999, the Company entered into an Employment Agreement
with Wong Wah On. In accordance with the terms of the Employment Agreement, Mr.
Wong has been employed by the Company as the Financial Controller and Corporate
Secretary and to perform such duties as the Board of Directors shall from time
to time determine. Mr. Wong shall receive a base salary of HK$1,200,000
(US$153,846) annually, which base salary shall be adjusted on each anniversary
of the Employment Agreement to reflect a change in the applicable consumer price
index or such greater amount as the Company's Board of Directors may determine.
The Employment Agreement has a term of two years and shall be automatically
renewed unless earlier terminated as provided therein.
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, 2001, no holder of stock
options exercised such options. All stock options granted on July 1, 1995 either
lapsed due to termination of employment or were cancelled, and all options
granted on June 15, 2001 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,
2001, 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 29, 2002 the number of shares owned by each such person and the
percentage of the outstanding shares and vote represented thereby.
-24-
Amount and
Name and Address Nature of Percent of Percent of
of Beneficial Owner Beneficial Ownership (1) Class Vote
------------------- -------------------------- ----- ------
Winsland Capital Limited 33,480 Common Stock 4.00% 30.53%
TrustNet Chambers 320,000 Series B Preferred 100%
P.O. Box 3444, Road Town
Tortola, British Virgin Islands
Worlder International Company 48,600 Common Stock 5.80% 4.20%
Limited (2)
21/F., Great Eagle Centre
No. 23 Harbour Road
Hong Kong
Anka Capital Limited 244,897 Common Stock 29.23% 21.15%
Room 2105, West Tower
Shun Tak Centre, 200 Connaught Rd. C
Hong Kong
(1) The inclusion herein of any shares deemed beneficially owned does not
constitute an admission of beneficial ownership of these shares.
(2) Of the 48,600 shares of Common Stock indicated, Worlder International
Company Limited ("Worlder") directly owns 35,100 shares, and the remaining
13,500 shares are 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 and voting power of Common Stock or Series B Preferred
Stock as of March 29, 2002, 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 Percent of
Beneficial Owner Beneficial Ownership (1) Class Vote
---------------- ------------------------- ---------- ----------
Ching Lung Po 73,480 Common Stock (2) 4.00% 30.53%
320,000 Series B Preferred 100.00%
Tam Cheuk Ho 284,897 Common Stock (3) 29.23% 21.15%
Wong Wah On 289,217 Common Stock (4) 29.75% 21.52%
Wan Ying Lin -0- N/A N/A
Ng Kin Sing -0- N/A N/A
Lo Kin Cheung -0- N/A N/A
All executive officers 402,697 Common Stock 33.74% 52.05%
and directors as a group 320,000 Series B Preferred 100.00%
-25-
(1) The inclusion herein of any shares deemed beneficially owned does not
constitute an admission of beneficial ownership of these shares.
(2) Winsland Capital Limited owns 33,480 shares of Common Stock and 320,000
shares of Series B Preferred Stock. Winsland Capital Limited is beneficially
owned by Ching Lung Po. The table includes 40,000 shares of Common Stock
issuable upon exercise of options granted under the Company's Stock Option Plan
as described under "Stock Options," below.
(3) Anka Capital Limited ("Anka") owns 244,897 shares of Common Stock. Anka is
50% owned by Tam Cheuk Ho and 50% owned by Wong Wah On. Tam Cheuk Ho disclaims
beneficial ownership of the securities held by Anka, except to the extent of his
pecuniary interest in the shares. The table includes 40,000 shares of Common
Stock issuable upon exercise of options granted under the Company's Stock Option
Plan as described under "Stock Options," below.
(4) Of the shares of Common Stock indicated, Brender Services Limited, which is
beneficially owned by Wong Wah On, owns 4,320 shares of Common Stock. The
remaining 244,897 shares represent shares of Common Stock owned by Anka which is
50% owned by Wong Wah On. Wong Wah On disclaims beneficial ownership of the
seurities held by Anka, except to the extent of his pecuniary interest in the
shares. The table includes 40,000 shares of Common Stock issuable upon exercise
of options granted under the Company's Stock Option 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, 24,000 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; or (b) change the
classes of employees eligible to participate 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 80% of the fair market value of the shares
on the date the option is granted, as the Committee determines.
-26-
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 certain officers,
directors, employees and consultant to purchase 24,000 shares of the Company's
Common Stock: All of the stock options were issued in accordance with the terms
of the Plan at an exercise price of US$378 (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$42 (the fair market value of the Common Stock as of
May 20, 1996). By virtue of this action, the outstanding options would have been
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.
As of June 15, 2001, the board of directors adopted the recommendations
of the committee of disinterested persons appointed by the board of directors in
accordance with the terms of the Plan and granted stock options to purchase
shares of the Company's Common Stock to the following officers, directors and
employees:
Ching Lung Po 40,000 shares
Tam Cheuk Ho 40,000 shares
Wong Wah On 40,000 shares
Ma Sin Ling 30,000 shares
Tse Chi Kai 10,000 shares
Fu Yang Guang 1,000 shares
Lin Jia Ping 1,000 shares
Yu Jing Song 1,000 shares
On the same date, all stock options previously granted were cancelled.
[Item 13] CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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,
-27-
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%. HARC
disposed of its 12.64% equity interest in Xilian Mill to the Farming Bureau for
consideration of Rmb5 million (US$603,865) pursuant to an Agreement for the Sale
and Purchase of Shares in Xilian Timber Mill dated April 27, 2001.
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. On July 1, 2001, pursuant
to mutual agreement, both parties agreed to terminate the rental agreement. For
each of the two years ended December 31, 2000 and 2001, HARC paid rental of
Rmb170,240 (US$20,560) and Rmb85,000 (US$10,266), respectively, to Farming
Bureau.
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. (formerly known as "Everbright Finance
and Investment Co. Ltd.") (1,184,000 shares), Worlder International Company
Limited (1,184,000 shares), and Silverich Limited (1,600,000 shares).
On July 22, 1996, the Company entered into an Exchange Agreement with
China Everbright Financial Holdings Limited ("Everbright") , pursuant to which
all 6,400,000 outstanding shares of the Company's Series A Preferred Stock held
by Everbright were exchanged for 320,000 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.
As of December 31, 1996, the Company entered into another Exchange
Agreement with Everbright, pursuant to which the 320,000 shares of restricted
Common Stock were exchanged for 320,000 shares of the Company's Series B
Preferred stock. The terms of the Series B Preferred stock were amended by the
Board of Directors in connection with the new Exchange Agreement, and such
Series B Preferred stock is not convertible and has no dividend rights or rights
to receive distributions upon dissolution and liquidation of the Company. The
Series B Preferred stock also may not be included in any registration statement
filed by the Company, and the Company will not take any action to facilitate the
registration of the Series B Preferred stock, until after July 22, 2000.
As of April 30, 1998, the Company entered into an agreement with
Guilinyang Farm pursuant to which Guilinyang Farm agreed to sell and the Company
agreed to buy 5,000,000 shares, representing 5% of the total issued and
outstanding share capital of HARC, for consideration of Rmb7 million
(US$845,411).
On March 3, 2000, the Company, the Farming Bureau and Billion Luck
entered into a Shareholders' Agreement of Business Restructuring where they, as
the shareholders of HARC, approved the cessation of the natural rubber
distribution business and the procurement of materials and supplies business,
effective as of January 1, 2000.
On March 3, 2000, the Farming Bureau, HARC, First Supply, Second Supply
and Sales Centre entered into an Assets and Staff Transfer Agreement, by which
the Farming Bureau purchased assets and assumed liabilities and staff related to
the ceased businesses, effective as of January 1, 2000. The purchase price was
the book value or the fair value of net assets transferred, as determined by an
independent professional valuer, as of December 31, 1999, whichever was lower.
Based on the valuation, there were no material differences between the fair
value and the net book value of those assets and liabilities as of December 31,
1999 and the purchase price was Rmb70,527,000 (US$8,518,000). There was no gain
or loss recognized by the Company.
-28-
On September 1, 2000, the Company and Anka Consultants Limited, a
private Hong Kong company which is owned by certain directors of the Company,
entered into an office sharing agreement, from which the Company's head office
in Hong Kong is shared on an equal basis between the two parties. The lease is
for a period of 2 years from September 1, 2000 to August 31, 2002. The office
sharing agreement also provides that the Company shall share certain costs and
expenses in connection with its use of the office. For the years ended December
31, 2000 and 2001, the Company paid rental expenses to Anka Consultants Limited
amounted to HK$46,000 (US$6,000) and HK$276,000 (US$35,000), respectively.
On April 30, 2001, Billion Luck, through its nominees, acquired 39%
minority equity interest in HARC from the Farming Bureau, for total
consideration of Rmb129,405,000 (US$15,629,000). Concurrent with the
acquisition, HARC entered into several agreements with the Farming Bureau to
dispose of its certain assets, including 24,877,008 shares of Hainan Sundiro
Motorcycle Co. Ltd., for consideration of Rmb70 million (US$8,454,000), a 12.64%
equity interest in Xilian Mill for consideration of Rmb5 million (US$603,865)
and 58% interest in Hainan Weilin for consideration of Rmb3.8 million
(US$459,000).
Other related party transactions are disclosed elsewhere in this Report
under "Stock Options" and "Executive Compensation".
-29-
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 operations for the three
years ended December 31, 1999, 2000 and 2001
b. Consolidated statements of changes in shareholders'
equity for the three years ended December 31, 1999,
2000 and 2001
c. Consolidated balance sheets as of December 31, 2000
and 2001
d. Consolidated statements of cash flows for the three
years ended December 31, 1999, 2000 and 2001
e. Notes to consolidated financial statements.
The information required in Schedule 11 valuation and qualifying
accounts is included in the notes to the consolidated financial
statements on page F-7. All other schedules for which provision is made
in the applicable accounting regulation of the Securities and Exchange
Commission are not required under the related instructions or are
unapplicable and therefore have been omitted.
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.)
-30-
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 Rental Agreement, by and between the Farming Bureau and HARC
(ORIGINAL CHINESE VERSION WITH ENGLISH TRANSLATION FILED AS
EXHIBIT 10.14 TO ANNUAL REPORT ON FORM 10-K/A FOR THE FISCAL
YEAR ENDED DECEMBER 31, 1994, AND INCORPORATED HEREIN BY
REFERENCE.)
10.2 China Resources Development, Inc., 1995 Stock Option Plan,
adopted as of March 31, 1995 (FILED AS EXHIBIT 10.18 TO
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.)
10.3 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 AS
EXHIBIT 10.26 TO ANNUAL REPORT ON FORM 10-K FOR THE FISCAL
YEAR ENDED DECEMBER 31, 1995, AND INCORPORATED HEREIN BY
REFERENCE.)
10.4 China Resources Development, Inc., Amended and Restated 1995
Stock Option Plan, as amended on December 30, 1996 (FILED AS
EXHIBIT 10.34 TO ANNUAL REPORT ON FORM 10-K/A FOR THE FISCAL
YEAR ENDED DECEMBER 31, 1996, AND INCORPORATED HEREIN BY
REFERENCE.)
10.5 Stock Purchase Agreement, by and between HARC and Guilinyang
Farm, dated December 29, 1997. (CERTIFIED ENGLISH TRANSLATION
OF ORIGINAL CHINESE VERSION FILED AS EXHIBIT 10.39 TO ANNUAL
REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31,
1997, AND INCORPORATED HEREIN BY REFERENCE.)
10.6 Agreement for the Sale and Purchase of Share in HARC, dated
April 30, 1998, by and between Guilinyang Farm and the Company
(CERTIFIED ENGLISH TRANSLATION OF ORIGINAL CHINESE VERSION
FILED AS EXHIBIT 10.41 TO QUARTERLY REPORT ON FORM 10-Q FOR
THE FISCAL QUARTER ENDED JUNE 30, 1998, AND INCORPORATED
HEREIN BY REFERENCE.)
10.7 Employment Agreement between the Company and Li Feilie, dated
August 1, 1998 (FILED AS EXHIBIT 10.42 TO ANNUAL REPORT ON
FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998, AND
INCORPORATED HEREIN BY REFERENCE.)
10.8 Employment Agreement between the Company and Tam Cheuk Ho,
dated February 1, 1999 (FILED AS EXHIBIT 10.43 TO ANNUAL
REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31,
1998, AND INCORPORATED HEREIN BY REFERENCE.)
10.9 Employment Agreement between the Company and Wong Wah On,
dated February 1, 1999 (FILED AS EXHIBIT 10.44 TO ANNUAL
REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31,
1998, AND INCORPORATED HEREIN BY REFERENCE.)
-31-
10.10 Service Agreement between the Company and Ching Lung Po, dated
February 1, 1999 (FILED AS EXHIBIT 10.45 TO ANNUAL REPORT ON
FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998, AND
INCORPORATED HEREIN BY REFERENCE.)
10.11 Assets and Staff Transfer Agreement by and among the Farming
Bureau, HARC, First Supply, Second Supply and Sales Centre
dated March 3, 2000 (CERTIFIED ENGLISH TRANSLATION OF ORIGINAL
CHINESE VERSION FILED AS EXHIBIT 10.23 TO CURRENT REPORT ON
FORM 8-K DATED MARCH 18, 2000, AND INCORPORATED HEREIN BY
REFERENCE.)
10.12 Shareholders' Agreement on Business Restructuring by and among
the Farming Bureau, the Registrant and Billion Luck dated
March 3, 2000 (CERTIFIED ENGLISH TRANSLATION OF ORIGINAL
CHINESE VERSION FILED AS EXHIBIT 10.24 TO CURRENT REPORT ON
FORM 8-K DATED MARCH 18, 2000, AND INCORPORATED HEREIN BY
REFERENCE.)
10.13 Acquisition Agreement among the Registrant, E-link Investment
Limited and Silver Moon Technologies Limited, dated June 30,
2000 (FILED AS EXHIBIT 10.25 TO CURRENT REPORT ON FORM 8-K
DATED JUNE 30, 2000, AND INCORPORATED HEREIN BY REFERENCE.)
10.14 Stock Purchase Agreement by and between HARC and Guilinyang
Farm dated July 28, 2000 (CERTIFIED ENGLISH TRANSLATION OF
ORIGINAL CHINESE VERSION FILED AS EXHIBIT 10.26 TO CURRENT
REPORT ON FORM 8-K DATED JULY 28, 2000, AND INCORPORATED
HEREIN BY REFERENCE.)
10.15 Agreement for the Sale and Purchase of Shares in HARC by and
between the Farming Bureau and Shenzhen Shenhua Investment Co.
Ltd. dated April 17, 2001 (CERTIFIED ENGLISH TRANSLATION OF
ORIGINAL CHINESE VERSION FILED AS EXHIBIT 10.27 TO CURRENT
REPORT ON FORM 8-K FILED MAY 17, 2001, AND INCORPORATED HEREIN
BY REFERENCE.)
10.16 Agreement for the Sale and Purchase of Shares in HARC by and
between the Farming Bureau and Shenzhen Fengsun Development
Co. Ltd. dated April 17, 2001 (CERTIFIED ENGLISH TRANSLATION
OF ORIGINAL CHINESE VERSION FILED AS EXHIBIT 10.28 TO CURRENT
REPORT ON FORM 8-K FILED MAY 17, 2001, AND INCORPORATED HEREIN
BY REFERENCE.)
10.17 Agreement for the Sale and Purchase of Shares in HARC by and
between the Farming Bureau and Hainan Zhongwei Trading Co.
Ltd. dated April 17, 2001 (CERTIFIED ENGLISH TRANSLATION OF
ORIGINAL CHINESE VERSION FILED AS EXHIBIT 10.29 TO CURRENT
REPORT ON FORM 8-K FILED MAY 17, 2001, AND INCORPORATED HEREIN
BY REFERENCE.)
10.18 Agreement for the Sale and Purchase of Shares in HARC by and
between the Farming Bureau and Shenzhen Chaopeng Investment
Co. Ltd. dated April 17, 2001 (CERTIFIED ENGLISH TRANSLATION
OF ORIGINAL CHINESE VERSION FILED AS EXHIBIT 10.30 TO CURRENT
REPORT ON FORM 8-K FILED MAY 17, 2001, AND INCORPORATED HEREIN
BY REFERENCE.)
10.19 Agreement for the Sale and Purchase of Shares in HARC by and
between the Farming Bureau and Shenzhen Feishang Development
Co. Ltd. dated April 17, 2001 (CERTIFIED ENGLISH TRANSLATION
OF ORIGINAL CHINESE VERSION FILED AS EXHIBIT 10.31 TO CURRENT
REPORT ON FORM 8-K FILED MAY 17, 2001, AND INCORPORATED HEREIN
BY REFERENCE.)
10.20 Form of Declaration of Trust (CERTIFIED ENGLISH TRANSLATION OF
ORIGINAL CHINESE VERSION FILED AS EXHIBIT 10.32 TO CURRENT
REPORT ON FORM 8-K FILED MAY 17, 2001, AND INCORPORATED HEREIN
BY REFERENCE.)
10.21 Agreement for the Sale and Purchase of Shares in Xilian Timber
Mill by and between HARC and the Farming Bureau dated April
17, 2001 (CERTIFIED ENGLISH TRANSLATION OF ORIGINAL CHINESE
VERSION
-32-
FILED AS EXHIBIT 10.33 TO CURRENT REPORT ON FORM 8-K FILED MAY
17, 2001, AND INCORPORATED HEREIN BY REFERENCE.)
10.22 Agreement for the Sale and Purchase of Shares in Hainan Weilin
by and between HARC and the Farming Bureau dated April 17,
2001 (CERTIFIED ENGLISH TRANSLATION OF ORIGINAL CHINESE
VERSION FILED AS EXHIBIT 10.34 TO CURRENT REPORT ON FORM 8-K
FILED MAY 17, 2001, AND INCORPORATED HEREIN BY REFERENCE.)
10.23 Agreement for the Sale and Purchase of Shares in Hainan
Sundiro Motorcycle Co. Ltd. by and between HARC and the
Farming Bureau dated April 17, 2001 (CERTIFIED ENGLISH
TRANSLATION OF ORIGINAL CHINESE VERSION FILED AS EXHIBIT 10.35
TO CURRENT REPORT ON FORM 8-K FILED MAY 17, 2001, AND
INCORPORATED HEREIN BY REFERENCE.)
11.3 Computation of Earnings Per Share for Fiscal Year ended
December 31, 2001 (CONTAINED IN FINANCIAL STATEMENTS FILED
HEREWITH.)
21 Subsidiaries of the Registrant (FILED HEREWITH.)
During the last quarter of the fiscal year ended December 31, 2001, the
Company filed no reports on Form 8-K.
-33-
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/ Ching Lung Po
----------------------------------
Ching Lung Po, 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/ Ching Lung Po President, Chairman of the April 15, 2002
--------------------------- Board of Directors, Chief
Ching Lung Po Executive Officer
/s/ Tam Cheuk Ho Chief Financial Officer/ April 15, 2002
--------------------------- Director
Tam Cheuk Ho
/s/ Wong Wah On Financial Controller/ April 15, 2002
--------------------------- Director/Secretary
Wong Wah On
/s/ Wan Ying Lin Director April 15, 2002
------------------------------------
Wan Ying Lin
/s/ Ng Kin Sing Director April 15, 2002
------------------------------------
Ng Kin Sing
/s/ Lo Kin Cheung Director April 15, 2002
------------------------------------
Lo Kin Cheung
-34-
Consolidated Financial Statements
CHINA RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES
Years ended December 31, 2000 and 2001
with report of independent auditors
CHINA RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Pages
Report of independent auditors F-1
Consolidated statements of operations F-2 - F-3
Consolidated balance sheets F-4 - F-5
Consolidated statements of shareholders' equity F-6
Consolidated statements of cash flows F-7
Notes to consolidated financial statements F-8 - F-32
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
China Resources Development, Inc.
We have audited the accompanying consolidated balance sheets of China Resources
Development, Inc. and subsidiaries as of December 31, 2000 and 2001, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the three years in the period ended December 31, 2001. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of China Resources
Development, Inc. and subsidiaries at December 31, 2000 and 2001, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States of America.
Ernst & Young
Hong Kong
March 28, 2002
F-1
CHINA RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31, 1999, 2000 and 2001
(Amounts in thousands, except share and per share data)
Year ended December 31,
Notes 1999 2000 2001 2001
RMB RMB RMB US$
NET SALES* 3 476,367 5,559 10,092 1,219
COST OF SALES* 3 (468,021) (5,096) (9,832) (1,188)
-------- -------- -------- --------
GROSS PROFIT 8,346 463 260 31
DEPRECIATION (1,085) (942) (815) (98)
AMORTIZATION 4 -- (2,841) (6,628) (801)
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES* (23,785) (18,608) (15,219) (1,839)
FINANCIAL INCOME, NET 5 864 7,871 1,318 159
LOSS ON DISPOSITION OF ASSETS 4 -- -- (16,001) (1,933)
OTHER INCOME/(EXPENSE), NET* 6 10,338 (145) 7,346 888
-------- -------- -------- --------
LOSS FROM CONTINUED OPERATIONS
BEFORE INCOME TAXES (5,322) (14,202) (29,739) (3,593)
INCOME TAXES 7 -- (2,887) (1,579) (191)
-------- -------- -------- --------
LOSS FROM CONTINUED OPERATIONS
BEFORE MINORITY INTERESTS (5,322) (17,089) (31,318) (3,784)
MINORITY INTERESTS (1,674) (4,634) 1,198 145
-------- -------- -------- --------
LOSS FROM CONTINUED OPERATIONS (6,996) (21,723) (30,120) (3,639)
DISCONTINUED OPERATIONS
Loss on continuing operations of
discontinued timber segment 4 -- (1,477) (24) (3)
-------- -------- -------- --------
NET LOSS (6,996) (23,200) (30,144) (3,642)
======== ======== ======== ========
LOSS PER SHARE: 8
Basic and diluted
Continuing operations (11.80) (30.37) (35.95) (4.35)
Discontinued operations -- (2.06) (0.03) --
-------- -------- -------- --------
(11.80) (32.43) (35.98) (4.35)
======== ======== ======== ========
F-2
CHINA RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31, 1999, 2000 and 2001
(Amounts in thousands, except share and per share data)
* Including the following amounts resulting from transactions with
related parties (note 18):
Year ended December 31,
1999 2000 2001 2001
RMB RMB RMB US$
NET SALES 23,718 -- -- --
COST OF SALES (453,071) (100) -- --
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES (1,028) (393) (306) (37)
OTHER INCOME, NET -- 1,354 -- --
The accompanying notes are an integral part of these consolidated financial statements.
F-3
CHINA RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of December 31, 2000 and 2001
(Amounts in thousands, except share and per share data)
December 31,
Notes 2000 2001 2001
------- ------- -------
RMB RMB US$
ASSETS
CURRENT ASSETS
Cash and cash equivalents 36,924 7,627 922
Marketable securities 9 62,384 5,744 694
Inventories - Finished goods 598 610 74
Other receivables, deposits and prepayments 10,585 4,635 560
Short term loans receivable 10 -- 15,488 1,871
Amount due from Farming Bureau 18 13,509 -- --
Amounts due from related companies 18 636 636 77
Amounts due from employees 18 622 896 108
Net assets of discontinued operations 4 2,388 -- --
------- ------- -------
TOTAL CURRENT ASSETS 127,646 35,636 4,306
PROPERTY AND EQUIPMENT 11 9,044 7,279 879
PROPERTY, PLANT AND EQUIPMENT
OF DISCONTINUED OPERATIONS 4 4,260 -- --
INVESTMENTS 12 184,374 109,615 13,244
INTANGIBLE ASSETS 4 7,860 -- --
VALUE-ADDED TAX RECEIVABLE -- 4,687 566
------- ------- -------
TOTAL ASSETS 333,184 157,217 18,995
======= ======= =======
F-4
CHINA RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
As of December 31, 2000 and 2001
(Amounts in thousands, except share and per share data)
December 31,
Notes 2000 2001 2001
-------- -------- --------
RMB RMB US$
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable 269 247 30
Other payables and accrued liabilities 13 16,477 16,569 2,002
Margin loan payable 14 18,572 -- --
Due to investment adviser 12,253 -- --
Income taxes payable/(recoverable) (225) 454 55
Amounts due to related companies 18 666 366 44
-------- -------- --------
TOTAL CURRENT LIABILITIES 48,012 17,636 2,131
MINORITY INTERESTS 115,480 -- --
-------- -------- --------
TOTAL LIABILITIES AND
MINORITY INTERESTS 163,492 17,636 2,131
-------- -------- --------
COMMITMENTS 24
SHAREHOLDERS' EQUITY
Common stock, US$0.001 par value:
Authorized - 200,000,000 shares
Issued and outstanding - 837,797 shares
in 2000 and 2001 7 7 1
Preferred stock, authorized -
10,000,000 shares in 2001 and 2000:
Series B preferred stock, US$0.001 par value: 17
Authorized - 320,000 shares
Issued and outstanding - 320,000 shares in
2000 and 2001 3 3 1
Additional paid-in capital 169,052 169,052 20,425
Reserves 22 28,028 28,028 3,386
Accumulated deficit 22 (27,416) (57,560) (6,955)
Accumulated other comprehensive gains 23 18 51 6
-------- -------- --------
TOTAL SHAREHOLDERS' EQUITY 169,692 139,581 16,864
-------- -------- --------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY 333,184 157,217 18,995
======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements.
F-5
CHINA RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the years ended December 31, 1999, 2000 and 2001
(Amounts in thousands, except share and per share data)
Retained Accumulated
Series B Additional earnings/ other
Common preferred paid-in (accumulated comprehensive
Notes stock stock capital Reserves deficits) gains/(losses) Total
----- ----- ------- -------- --------- -------------- -----
RMB RMB RMB RMB RMB RMB RMB
Balance at January
1, 1999 5 3 156,632 26,274 4,534 (4) 187,444
Net loss (6,996) (6,996)
Currency translation
adjustments 23 (14) (14)
--------
Comprehensive loss (7,010)
--------
Transfer to reserves 22 556 (556) --
-------- -------- -------- -------- -------- -------- --------
Balance at December
31, 1999 5 3 156,632 26,830 (3,018) (18) 180,434
Issuance of 244,897
shares of common stock 4 2 12,420 12,422
Net loss (23,200) (23,200)
Currency translation
adjustments 23 36 36
--------
Comprehensive loss (10,742)
--------
Transfer to reserves 22 1,198 (1,198)
-------- -------- -------- -------- -------- -------- --------
Balance at December
31, 2000 7 3 169,052 28,028 (27,416) 18 169,692
Net loss (30,144) (30,144)
Currency translation
adjustments 23 33 33
--------
Comprehensive loss (30,111)
-------- -------- -------- -------- -------- -------- --------
Balance at December
31, 2001 7 3 169,052 28,028 (57,560) 51 139,581
======== ======== ======== ======== ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements.
F-6
CHINA RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1999, 2000 and 2001
(Amounts in thousands, except share and per share data)
Year ended December 31,
1999 2000 2001 2001
-------- -------- -------- --------
RMB RMB RMB US$
OPERATING ACTIVITIES
Net loss (6,996) (23,200) (30,144) (3,642)
Adjustments to reconcile net loss to net cash
provided by/(used in) operating activities:
Depreciation and amortization 1,091 3,850 7,510 907
Write off of intangible asset -- -- 2,936 355
Loss on disposition of assets -- -- 16,001 1,933
Provision for inventory write-downs -- 1,129 -- --
Stock-based compensation issued to non-employees 983 279 -- --
Minority interests 1,674 4,198 (1,215) (147)
Loss on disposal of property and equipment, net 910 1,000 466 56
Loss on disposal of an equity method investment 662 -- -- --
Write-off of goodwill 994 -- -- --
Changes in operating assets and liabilities:
Marketable securities (57,035) (5,349) 56,640 6,843
Trade receivables 4,844 3,531 -- --
Inventories 2,453 5,103 (12) (2)
Other receivables, deposits and prepayments 17,308 1,790 1,682 203
Amount due from Farming Bureau (13,346) 10,889 (1,096) (132)
Amounts due from related companies (5,188) 34,822 31 4
Amounts due from employees -- (622) (274) (33)
Accounts payable 3,049 (14,505) (22) (3)
Other payables and accrued liabilities 9,153 24,671 (41,323) (4,992)
Income taxes payable -- (16,591) 679 82
Amounts due to related companies (2,276) (28,349) (300) (36)
-------- -------- -------- --------
Net cash provided by/(used in) operating activities (41,720) 2,646 11,559 1,396
-------- -------- -------- --------
INVESTING ACTIVITIES
Purchases of property and equipment (6,160) (6,355) (665) (80)
Proceeds from disposal of investments -- 883 -- --
Acquisition of subsidiaries -- 25 -- --
Acquisition of minority interest in a subsidiary -- -- (36,000) (4,350)
Disposal of a subsidiary -- -- (1) --
Short term loans advanced to third parties (45,000) -- (21,852) (2,640)
Repayment of a short term loan from a third party -- -- 6,364 769
-------- -------- -------- --------
Net cash used in investing activities (51,160) (5,447) (52,154) (6,301)
-------- -------- -------- --------
FINANCING ACTIVITIES
Advance from minority interest 1,780 1,587 -- --
Advances from a former vice president -- -- 11,298 1,365
-------- -------- -------- --------
Net cash provided by financing activities 1,780 1,587 11,298 1,365
-------- -------- -------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (91,100) (1,214) (29,297) (3,540)
Cash and cash equivalents, at beginning of year 129,238 38,138 36,924 4,462
-------- -------- -------- --------
Cash and cash equivalents, at end of year 38,138 36,924 7,627 922
======== ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements.
F-7
CHINA RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
1. ORGANIZATION AND PRINCIPAL ACTIVITIES
China Resources Development, Inc. (the "Company") and its subsidiaries
(collectively the "Group") were principally engaged in the distribution
of natural rubber, procurement of materials and supplies and the
distribution of other agricultural products in the People's Republic of
China (the "PRC") through December 31, 1999.
Pursuant to a business restructuring as detailed in note 3 to the
consolidated financial statements, the Group discontinued all the above
operations effective on January 1, 2000. In the fourth quarter of 1999,
the Group established several new lines of business, including the
operation of a supermarket and processed timber operations in the PRC.
In addition, as described in note 4, during 2000, the Group acquired an
80% interest in an entity which provides health care information
through an Internet website.
Notwithstanding the cessation of natural rubber operations in early
2000, the Group was engaged in trading of natural rubber occasionally
during 2001, depending on market conditions. Pursuant to the business
acquisitions and disposition of assets as detailed in note 4 to the
consolidated financial statements, the Group discontinued the timber
processing operations effective on April 30, 2001. The Group continues
to consider other new investment opportunities.
Information on the Group's operations by segment are included in note
28 to the consolidated financial statements.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Principles of consolidation
---------------------------
The consolidated financial statements are prepared in
accordance with accounting principles generally accepted in
the United States of America ("US GAAP") and include the
accounts of the Company and its subsidiaries. Significant
intercompany accounts and transactions have been eliminated on
consolidation.
(b) Use of estimates
----------------
The preparation of the consolidated financial statements in
conformity with US GAAP requires management to make estimates
and assumptions that affect the amounts reported in the
consolidated financial statements and accompanying notes.
Actual results could differ from those estimates.
(c) Cash and cash equivalents
-------------------------
The Group considers all highly liquid investments and cash
deposits with financial institutions with original maturities
of three months or less to be cash equivalents.
At December 31, 2000 and 2001, cash and cash equivalents
included foreign currency deposits equivalent to RMB5,872
(US$223 and HK$3,799) and RMB5,418 (US$65 and HK$4,601),
respectively.
F-8
CHINA RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
(d) Marketable securities
---------------------
Equity securities that are bought and held principally for the
purpose of selling them in near term are classified as trading
securities and reported at fair value, with unrealized gains
and losses included in current operations.
(e) Inventories
-----------
Inventories are primarily comprised of finished goods and are
stated at the lower of cost or market. Cost is determined
using the first-in, first-out method.
(f) Property and equipment
----------------------
Property and equipment are stated at cost less accumulated
depreciation. Expenditures for routine repairs and maintenance
are expensed as incurred.
Depreciation is calculated on the straight-line basis to
write-off the cost less estimated residual value of each asset
over its estimated useful life. Estimated useful lives used
for this purpose are as follows:
Buildings 25 years
Leasehold improvements Over the terms of the leases
Machinery, equipment and motor vehicles 10 - 12.5 years
Fixtures and furnitures 10 - 12.5 years
(g) Investments
-----------
Investments in companies that are 20% to 50% owned, and over
which the Group is in a position to exercise significant
influence but does not control the financial and operating
decisions, are accounted for by the equity method.
All other equity investments, not being a subsidiary and which
do not have a readily determinable fair value, are accounted
for by the cost method, unless there has been an
other-than-temporary impairment in value, in which event they
are written-down to their net realizable value.
(h) Intangible assets
-----------------
Intangible assets consist of acquired website technology which
are amortized on the straight-line basis over two years.
Intangible assets are periodically reviewed for impairment
based on an assessment of future operations. Accumulated
amortization was RMB2,841 and RMB9,469 at December 31, 2000
and 2001, respectively.
(i) Retirement benefits
-------------------
The contributions to the retirement plans of employees under
defined contribution retirement plans are charged to earnings
as services are provided.
F-9
CHINA RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
(j) Stock-based compensation
------------------------
The Group has elected to follow Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25"), and related interpretations in accounting for its
employee stock options, because the Group believes the
alternative fair value accounting provided for under Financial
Accounting Standards Board ("FASB") Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), requires the use of option
valuation models that were not developed for use in valuing
employee stock options. Under APB 25, because the exercise
price of the Group's employee stock options equals the market
price of the underlying stock on the date of grant, no
compensation expense is recognized. For disclosure purposes,
pro forma information in accordance with SFAS 123 has been
included in note 16.
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 the consolidated
statement of operations over the respective service period.
(k) Revenue recognition
-------------------
Revenue from product sales is recognized at the point of sale
for retail sales and upon the delivery of goods for other
sales, when all performance obligations have been completed
and is reasonably assured of collectibility. Rental income is
recognized on the straight-line basis over the lease terms.
Dividend income is recognized upon the establishment of the
right to receive such payment.
(l) Income taxes
------------
The Group uses the asset and liability method of accounting
for income taxes. Under the asset and liability method,
deferred tax assets and liabilities are recognized for the
estimated future tax consequences attributable to differences
between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. This
method also requires the recognition of future tax benefits
such as net operating loss carry forwards, to the extent that
realization of such benefits is more likely than not. Deferred
tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered
or settled.
(m) Loss per share
--------------
Basic and diluted loss per share are calculated in accordance
with SFAS 128, "Earnings per Share".
(n) Advertising costs
-----------------
All advertising costs are charged to the profit and loss account as
incurred.
F-10
CHINA RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
(o) Foreign currency translation
----------------------------
The functional currency of substantially all the operations of
the Group is Renminbi ("RMB"), the national currency of the
PRC. The financial statements of subsidiary operations with
functional currency other than RMB have been translated into
RMB in accordance with SFAS 52, "Foreign Currency
Translation". All balance sheet accounts have been translated
using the exchange rates in effect at the balance sheet date.
Statements of operations amounts have been translated using
the weighted average exchange rate for the year. Translation
gains and losses are included as a component of stockholders'
equity.
Transactions denominated in currencies other than RMB are
translated into RMB at the applicable rates of exchange
prevailing at that date. Monetary assets and liabilities
denominated in other currencies at the balance sheet date are
translated into RMB at the applicable rates of exchange at the
balance sheet dates. The resulting exchange gains or losses
are credited or charged to the consolidated statements of
operations.
The financial statements are stated in Renminbi. The
translation of amounts from RMB into US$ is included solely
for the convenience of the reader and has been made at the
rate of exchange quoted by the People's Bank of China on
December 31, 2001 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,
2001 or at any other date.
(p) Reverse stock split
-------------------
On May 28, 1999, 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.
(q) Written call
------------
Premiums on options written by the Group are recorded as
liabilities and the option is adjusted to the current fair
value at the balance sheet date. Premiums received from
writing options that are treated by the Group on the
expiration date as realized gains from investments. The
difference between the premiums and the amount paid on
effecting a closing purchase transaction, is also treated as a
realized gain, or, if the premium is less than the amount paid
for the closing purchase transaction, as a realized loss. The
Group as writer of options bears the market risk of an
unfavorable change in the price of the security underlying the
written option.
(r) Reclassifications
-----------------
Certain amounts in prior years have been reclassified to
conform to the current year presentation.
F-11
CHINA RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
3. DISCONTINUED OPERATION AND BUSINESS RESTRUCTURING
In the fourth quarter of 1999, the Group initiated a plan to
restructure its business in Hainan, the PRC. On March 3, 2000, the
board of directors of the Company approved a business restructuring
involving Hainan Zhongwei Agricultural Resources Company Limited
("HARC"), a 61%-owned subsidiary of the Company, and certain
subsidiaries of HARC (the "Restructuring"). The Restructuring resulted
in the discontinuation of substantially all of the then existing
operations of the Group as of December 31, 1999, including its two
principal lines of business, the distribution of natural rubber and the
procurement of materials, supplies and other agricultural products
(collectively the "Operating Subsidiaries").
On March 3, 2000, HARC and certain of its subsidiaries (the "HARC
Subsidiaries") entered into an Assets and Staff Transfer Agreement with
the Hainan Farming Bureau (the "Farming Bureau"), a division of the
Ministry of Agricultural of the PRC and a 39% minority shareholder of
HARC, pursuant to which the HARC Subsidiaries would transfer all the
assets, liabilities and staff related to the Rubber and Procurement
Operations to the Farming Bureau, effective from January 1, 2000 (the
"Transfer"). The consideration for the net assets transferred was
determined based on the lower of their net book value or their fair
value, as determined by an independent professional valuer, as of
December 31, 1999. Based on the valuation, there were no material
differences between the fair value and the net book value (as
determined under US GAAP) of those assets and liabilities as of
December 31, 1999, and, therefore, no gain or loss was recognized upon
the Transfer.
F-12
CHINA RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
4. BUSINESS ACQUISITIONS AND DISPOSITION OF ASSETS
On June 30, 2000 the Group entered into an acquisition agreement
("Acquisition") to acquire an 80% equity interest in Silver Moon
Technologies Limited ("Silver Moon"), a British Virgin Islands
corporation which was incorporated on March 24, 2000, for a
consideration of US$1,500 (RMB12,420) by issuing 244,897 shares of the
Company's unregistered restricted common stock of US$0.001 par value to
Silver Moon's former sole equity owner, E-link Investment Limited
("E-link"). The principal activities of Silver Moon and its
wholly-owned subsidiary, Zhongwei Medi-China.com Limited (formerly
known as Sky Creation Technology Limited), a Hong Kong company, is
providing healthcare content on the Internet which focuses on Chinese
herbal medicine and therapies.
The transaction was accounted for as a purchase; the cost of the
acquisition exceeds the fair value of the net assets acquired by
RMB12,405 which was classified as acquired website technology and was
being amortized over two years. In the forth quarter of 2001,
management determined that the website's functionality was inadequate
for the Company's intended purpose in view of the fact that no revenue
was generated during 2001 from the site and none is anticipated in the
foreseeable future. Consequently, an impairment charge was recorded for
the entire unamortized balance in the amount of RMB2,936.
Silver Moon did not report any revenue through the date of acquisition
by the Group. Pro forma net loss and net loss per share for the year
ended December 31, 2000, assuming the acquisition had been consummated
as of January 1, 2000, are RMB30,286 and RMB36.15, respectively.
During 2001, the Group recognized a loss of RMB 16,001 on the exchange
of: (i) cash of RMB36,000; (ii) its 13% equity interest in Xilian
Timber Mill; (iii) its 58% equity interest in Hainan Weilin Timber
Limited Liability Company ("Hainan Weilin"); and (iv) HARC's 5.3%
interest in Hainan Sundiro Motorcycle Co. Ltd. for the Farming Bureau's
39% equity interest in HARC, computed based on the carrying value of
assets exchanged. The results of operations and losses previously
allocated to the minority shareholder of HARC have been included from
the date of the exchange. In addition, as a result of this transaction,
the Group ceased timber processing operations.
F-13
CHINA RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
5. FINANCIAL INCOME, NET
Financial income, net represents:
Year ended December 31,
1999 2000 2001
-------------------------------
RMB RMB RMB
Interest income 948 11,749 1,537
Interest expense (5) (73) (229)
Foreign exchange gains/(losses), net (79) (3,805) 10
------- ------- -------
864 7,871 1,318
======= ======= =======
6. OTHER INCOME/(EXPENSE), NET
Other income/(expense), net represents:
Year ended December 31,
1999 2000 2001
------- ------- -------
RMB RMB RMB
Realized gain on call option written -- -- 3,182
Dividend income from cost method investments 6,664 -- --
Rental income 788 -- --
Net gain on trading of marketable securities 384 3,470 7,055
Loss on disposal of property and equipment, net (910) (1,000) (466)
Net loss on write-off of an equity
method investment (659) -- --
Recovery of bad debts written-off 2,902 -- 1,664
Share of income received from joint investment -- 9,195 --
Unrealized loss on marketable securities -- (11,151) (573)
Write off of acquired website technology -- -- (2,936)
Others 1,169 (659) (580)
------- ------- -------
10,338 (145) 7,346
======= ======= =======
F-14
CHINA RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
7. INCOME TAXES
Pre-tax loss from continuing operations for the years ended December 31
was taxed in the following jurisdictions:
Year ended December 31,
1999 2000 2001
------- ------- -------
RMB RMB RMB
PRC (excluding Hong Kong) 4,801 10,036 (6,728)
Other countries:
USA (651) (15,122) (23,748)
Hong Kong (9,472) (9,116) 737
------- ------- -------
(5,322) (14,202) (29,739)
======= ======= =======
The provision for income tax for continuing operations consisted of the
following:
Year ended December 31,
1999 2000 2001
-----------------------
RMB RMB RMB
Current:
PRC federal income tax - 2,887 1,579
===== ===== =====
It is management's intention to reinvest all the income attributable to
the Group earned by its operations outside the United States of America
(the "U.S."). Accordingly, no U.S. federal and state income taxes have
been provided in these consolidated financial statements.
The reconciliation of income taxes/(tax benefit) for income tax
computed at the PRC federal statutory tax rate applicable to foreign
investment enterprises operating in Hainan, a Special Economic Zone in
the PRC, to income tax expense is as follows:
Year ended December 31,
1999 2000 2001
------------------------------
RMB RMB RMB
PRC federal statutory tax rate 15% 15% 15%
Computed expected income taxes (tax benefit) (798) (2,131) (4,461)
Higher effective income tax rates
of other countries (2,025) (735) (4,505)
Net increase in valuation allowance 373 2,866 8,966
Tax on foreign personal holding
company income 2,450 -- --
Non-deductible expenses -- -- 1,263
Others -- 2,887 316
------ ------ ------
Income tax expense for the year -- 2,887 1,579
====== ====== ======
F-15
CHINA RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
7. INCOME TAXES (continued)
The deferred tax asset of the Group is comprised of the following:
December 31,
2000 2001
------- -------
RMB RMB
Deferred tax asset:
Net operating loss carry forwards 13,131 22,097
Less: Valuation allowance for deferred tax asset (13,131) (22,097)
------- -------
- -
======= =======
No undistributed earnings of the Group's foreign subsidiaries were
available at December 31, 2000 and 2001. Upon distribution of those
earnings in the form of dividends or otherwise, the Group would be
subject to U.S. income taxes. Determination of the amount of
unrecognized deferred U.S. income tax liability is not practicable
because of the complexities associated with its hypothetical
calculation.
At December 31, 2001, the Group had net operating loss carry forwards
("NOLs") of approximately RMB22 million for U.S. income tax purposes
that expire in various years through 2021. At December 31, 2001, the
Group's subsidiaries in the PRC had NOLs amounting to approximately
RMB3 million for PRC income tax purposes that expire in 2006.
8. LOSS PER SHARE
The following table sets forth the computation of basic and diluted
loss per share:
Year ended December 31,
1999 2000 2001
---------------------------------
RMB RMB RMB
Numerator
---------
Numerator for basic and diluted
loss per share: Loss attributable
to common shareholders (6,996) (23,200) (30,144)
======= ======= ========
Denominator
-----------
Denominator for basic loss per share:
Weighted-average number of shares 592,900 715,349 837,797
======= ======= ========
Basic and diluted loss per share (11.80) (32.43) (35.98)
======= ======= ========
F-16
CHINA RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
8. LOSS PER SHARE (continued)
Details of the stock options of the Company are set out in note 16.
The computation of diluted loss per share did not assume the conversion
of the stock options of the Company in 1999, 2000 and 2001 and the
warrants of the Company in 1999 and 2000 because their inclusion would
have been anti-dilutive.
9. MARKETABLE SECURITIES
December 31,
2000 2001
------- -------
RMB RMB
Trading securities listed on NASDAQ
At cost -- 1,478
Less: unrealized loss -- (21)
------- -------
Fair value -- 1,457
------- -------
Trading securities listed on the Hong Kong
Stock Exchange
At cost 78,798 4,839
Add: unrealized gain -- 113
Less: unrealized loss (16,414) (665)
------- -------
Fair value 62,384 4,287
------- -------
62,384 5,744
======= =======
10. SHORT TERM LOANS RECEIVABLE
As of December 31, 2001, the short term loans receivable represented
advances to three unaffiliated parties of RMB5,304, RMB1,697 and
RMB8,487 at annual interest rates of 8% (revised to 10% from February
8, 2002), 5% and 12% (revised to 8% from January 1, 2002),
respectively. These loans receivable are due at various dates through
December 30, 2002. Except for the loan of RMB8,487 which is secured by
a corporate guarantee granted by the holding company of the debtor, the
remaining loans are unsecured.
F-17
CHINA RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
11. PROPERTY AND EQUIPMENT
Property and equipment comprise:
December 31,
2000 2001
------- -------
RMB RMB
At cost:
Buildings 3,414 4,260
Leasehold improvements 1,429 --
Machinery, equipment and motor vehicles 6,128 4,124
Fixtures and furniture 208 208
------- -------
11,179 8,592
Accumulated depreciation (2,135) (1,313)
------- -------
9,044 7,279
======= =======
12. INVESTMENTS
Cost method investments comprise:
December 31,
2000 2001
------- -------
RMB RMB
Investments in:
Hainan Sundiro Motorcycle Co., Ltd. ("Sundiro") 179,615 109,615
PRC joint venture 4,759 --
------- -------
184,374 109,615
======= =======
Cost method investments are interests in unlisted shares/equity of PRC
companies in which the Group does not have a significant influence over
their operating and financial policies.
At December 31, 2000, the Group owned an equity interest of 8.7% of
Sundiro. During 2001, pursuant to the exchange of assets as described
in note 4, the Group disposed of 24,877,008 corporate shares of Sundiro
to the Farming Bureau. As a result, the Group owns an equity interest
of 5.3% of Sundiro as at December 31, 2001.
F-18
CHINA RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
13. OTHER PAYABLES AND ACCRUED LIABILITIES
December 31,
2000 2001
------ ------
RMB RMB
Advances from a former vice president 864 11,298
Accrued salaries of a director 735 1,106
Other payables 2,110 1,368
Accrued liabilities 2,675 2,797
Advances from an unaffiliated third party 6,911 --
Call options written, at fair value (premium received RMB3,182) 3,182 --
------ ------
16,477 16,569
====== ======
The advances from a former vice president are unsecured, interest-free
and have no fixed terms of repayment. The advances were repaid in full
as at January 10, 2002.
14. MARGIN LOAN PAYABLE
The Group had a margin loan payable balance of RMB18,572 as of December
31, 2000 which was used to purchase marketable securities listed on the
Hong Kong Stock Exchange. This margin loan bore interest at a variable
rate. The rate was 12% as of December 31, 2000. Interest expense on the
margin loan for the years ended December 31, 2000 and 2001 was
approximately RMB73 and RMB229, respectively. The margin loan was
repaid as the securities were sold during 2001.
15. DUE TO INVESTMENT ADVISER
According to an agreement made between the Group and Sanya Zhongya
Trust and Investment Company ("SZTI") in 2000, SZTI would use the
Group's deposits (approximately RMB45 million) for the trading of
securities on behalf of the Group and guarantee a minimum return. The
excess of the actual return over the minimum return is shared between
both parties on an agreed proportion. During the year ended December
31, 2000, the balance of the deposit was fully withdrawn and the actual
return exceeded the guaranteed return by RMB12,253, which was fully
repaid in 2001.
F-19
CHINA RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
16. STOCK OPTIONS
The Group 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 Group. Initially,
24,000 shares of common stock of the Group, after adjusting for the
Reverse Stock Split in 1999, 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 (RMB314.5) per share (the fair market
value of the common stock as of July 1, 1995) and are exercisable from
July 1, 1996 to July 1, 2005. On May 20, 1996, pursuant to a "Unanimous
Written Consent" of the committee appointed pursuant to the Plan and a
resolution of a special meeting of the Board of Directors of the Group,
the exercise price was changed to US$42.0 (RMB348.6) per share (the
fair market value of the common stock as of May 20, 1996), after
adjusting for the Reverse Stock Split in 1999 and 1996. By virtue of
that action, the outstanding options were then exercisable beginning on
May 20, 1997 until May 20, 2006.
On December 30, 1996, the Plan was amended to increase the number of
shares of common stock issuable under the Plan to 20% of the Group's
outstanding common stock, as determined at the time of granting of the
stock options. Such shares may represent authorized but unissued shares
as well as repurchased or forfeited shares for any grant under the Plan
that was expired or unexercised. Further amendments were made to give
the Board of Directors the ability to set a holding period of less than
one year for non-qualified stock options.
Pursuant to a special resolution of the Board of Directors on June 15,
2001, all stock options outstanding as of June 15, 2001 were canceled
and 163,000 new stock options were granted to officers, directors and
key employees of the Group at an exercise price of US$2.95 (RMB24.4)
per share (the fair market value of the common stock as of June 15,
2001). The options are exercisable from December 15, 2001 to June 14,
2004.
Pro forma information regarding net income and earnings per share is
required by SFAS 123, and has been determined as if the Group 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 the Black-Scholes option pricing model with the
following weighted average assumptions for 1995, 1996 and 2001,
respectively: risk-free interest rates of 6.50%, 6.78% and 4%; no
dividend yield; volatility factors of the expected market price of the
Company's common stock of 141.38%, 42.13% and 129.6%; and a weighted
average expected life of the options of 6 years, 6 years and 3 years,
respectively.
The Black-Scholes option pricing model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Company's stock options
have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in the management's opinion,
the existing models do not necessarily provide a reliable single
measure of the fair value of its stock options.
F-20
CHINA RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
16. STOCK OPTIONS (continued)
For the purposes of pro forma disclosures, the estimated fair value of
the options is amortized to expense over the options' vesting period.
The Company's pro forma information is as follows:
Year ended December 31,
1999 2000 2001
----------------------------------
RMB RMB RMB
Pro forma net loss (14,426) (30,630) (30,677)
======= ======= =========
Pro forma loss per share:
Basic and diluted (24.33) (42.82) (36.62)
======= ======= =========
The Company's stock option activities and related information for the
years ended December 31, 1999, 2000 and 2001 are summarized as follows:
1999 2000 2001
Weighted Weighted Weighted
average average average
exercise exercise exercise
Options price Options price Options price
---------------- --------------- ----------------
`000 US$ `000 US$ `000 US$
---- ---- ---- ---- ---- ----
Outstanding at
beginning of year 24 42 24 42 24 42
Canceled -- -- -- -- (24) (42)
Granted -- -- -- -- 163 2.95
---- ---- ---- ---- ---- -----
Outstanding at end of year 24 42 24 42 163 2.95
==== ==== ==== ==== ==== =====
All options outstanding as of December 31, 2001 have an aggregate
exercise price of US$481 (RMB3,981). The weighted average remaining
contractual life of those options is 3 years.
Shares of common stock reserved for future issuance at December 31,
2001 are 163,000.
17. PREFERRED STOCK
The preferred stock entitles the holders to voting rights to the same
extent and in the same manner as shares of common stock; has no
preemptive or other subscription rights and is not subject to any
future calls or assessments. There are no redemption or sinking fund
provisions applicable to the preferred stock and they have no rights to
dividends or to distribution upon liquidation or dissolution of the
Company.
F-21
CHINA RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
18. RELATED PARTY BALANCES AND TRANSACTIONS
In addition to those transactions set out in notes 3, 4, 12 and 26, the
Group had the following transactions with the Farming Bureau, certain
related companies controlled by the Farming Bureau and certain
shareholders/directors of the Company.
Year ended December 31,
Notes 1999 2000 2001
----------------------------------
RMB RMB RMB
Farming Bureau and related companies
controlled by the Farming Bureau:
Purchase of natural rubber (a) (450,704) -- --
======== ======== ========
Purchase of wood -- (100) --
======== ======== ========
Guaranteed gross profit received (a) 6,350 -- --
======== ======== ========
Net sales of materials, supplies and
other agricultural products (b) 23,718 -- --
======== ======== ========
Rental expenses paid (d) (739) (306) (391)
======== ======== ========
Manufacturing expenses paid -- (87) --
======== ======== ========
Shareholders/directors of the Company:
Consultancy fees paid (c) (289) -- --
======== ======== ========
(a) Purchase of natural rubber
Pursuant to a sales and purchase agreement dated November 5,
1994 and as subsequently amended (the "S&P Agreement") amongst
HARC, First Goods And Materials Supply And Sales Corporation,
Second Goods And Materials Supply And Sales Corporation
(collectively the "Principal Subsidiaries") and the Farming
Bureau, the Farming Bureau agreed to guarantee the supply of
natural rubber to the Principal Subsidiaries for a period of
15 years from November 5, 1994, under the same terms and
conditions as are offered to other purchasers of natural
rubber with a first right of refusal to the Principal
Subsidiaries. The Farming Bureau allows the Principal
Subsidiaries to set the selling price of natural rubber
according to market conditions and guarantees a minimum gross
profit margin of 3.5% (the "Guaranteed Margin") earned by
First Goods And Materials Supply And Sales Corporation and
Second Goods And Materials Supply And Sales Corporation
(collectively the "Operating Subsidiaries) on natural rubber
purchased from farms controlled by the Farming Bureau.
F-22
CHINA RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
18. RELATED PARTY BALANCES AND TRANSACTIONS (continued)
(a) Purchase of natural rubber (continued)
--------------------------------------
Pursuant to an amendment to the S&P Agreement, the Guaranteed
Margin was reduced to 1.5% with effect from April 1, 1999. The
Group neither purchased nor sold rubber under the terms of the
S&P Agreement during 2000 and 2001.
As more fully described note 3, effective January 1, 2000, the
Group transferred all of the assets, liabilities operations
and staff of the Operating Subsidiaries to the Farming Bureau.
(b) Procurement of materials and supplies
-------------------------------------
Pursuant to the S&P Agreement, the Farming Bureau also agreed
to purchase certain products sourced by the Principal
Subsidiaries for a period of 15 years from November 5, 1994 at
prices acceptable to all parties with a first right of refusal
to the Principal Subsidiaries.
(c) Consultancy fees
----------------
Brender Services Limited ("Brender"), which is beneficially
owned by a director of the Company, provided accountancy and
consulting services to the Group through February 1, 1999 for
HK$270 (RMB289) per month.
(d) Leases
------
The Group leases its office space located in Hainan, the PRC
from the Farming Bureau and the agreement expired on June 30,
2001. Also, the office spare in Hong Kong is leased from a
company affiliated with one of the Group's directors. The
lease expires on August 31, 2002.
As a result of the aforementioned transactions, the Group's amounts due
from/to the Farming Bureau, employees and related companies controlled
by the Farming Bureau or a shareholder of the Company consisted of:
December 31,
2000 2001
----------------
RMB RMB
Due from Farming Bureau 13,509 --
====== ======
Due from related companies 636 636
====== ======
Due from employees 622 896
====== ======
Due to related companies 666 366
====== ======
The balances with the Farming Bureau, employees and related companies
are unsecured, interest-free and are repayable on demand.
The balance with the employees represented bank accounts held by
employees on behalf of the Group.
F-23
CHINA RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
19. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Year ended December 31,
1999 2000 2001
--------------------------
RMB RMB RMB
Cash paid during the year for:
Interest expense 5 -- 229
==== ====== =======
Income tax - 1,800 1,346
==== ====== =======
Non-cash investing and financing activities:
Addition of intangible assets - 10,701 --
==== ====== =======
Acquisition of minority interest in a
subsidiary (note 4) - 12,400 114,265
==== ====== =======
20. 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,
short term loans receivable, amounts due from the Farming Bureau and
related companies and cost method investments.
(i) Cash and cash deposits
The Group maintains its cash and cash deposits primarily with
various PRC government authorized financial institutions. The
Group performs periodic evaluations of the relative credit
standing of those financial institutions that are considered
in the Group's investment strategy.
(ii) Short term loans receivable
One of the loans of RMB8,487 is secured by a corporate
guarantee granted by the holding company of the debtor, which
is a company listed on the Hong Kong Stock Exchange. The Group
carefully assesses the recoverability of other loans not
guaranteed or secured by collateral.
F-24
CHINA RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
20. CONCENTRATION OF RISK (continued)
(iii) Amounts due from the Farming Bureau and related companies
The Farming Bureau has guaranteed the recoverability of a
substantial portion of the amounts due from related companies,
all of which are State-owned entities controlled by the
Farming Bureau. The Group carefully assesses the
recoverability of those balances not guaranteed by the Farming
Bureau and generally does not require collateral. There were
no receivables from the Farming Bureau at December 31, 2001.
(iv) Cost method investments
The Group's cost method investments consist of interests in
unlisted shares/equity of PRC companies in which the Group
does not have a significant influence over their operating and
financial policies.
21. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Group in
estimating its fair value disclosures for financial instruments:
(i) Cash and cash equivalents
The carrying amount reported in the consolidated balance
sheets for cash and cash equivalents approximate their fair
value.
(ii) Marketable securities
The carrying amount reported in the consolidated balance
sheets for marketable securities represents their fair values.
The fair values for marketable securities are based on quoted
market prices.
(iii) Short term loans receivable, accounts payable, other payables
and margin loan
The carrying amounts reported in the balance sheet for short
term loans receivable, accounts payable, other payables and
margin loan approximate their fair values.
(iv) Amounts due from/to the Farming Bureau and related companies
The fair values of amounts due from/to the related companies
cannot be determined due to their related party nature of
those balances.
(v) Cost method investments
The Group believes that the carrying amounts represents the
Group's best estimate of current economic values of these
investments.
F-25
CHINA RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
21. FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
(vi) Written call option
The fair value of written call options was estimated using the
Black-Scholes option pricing model.
22. RESERVES AND DISTRIBUTION OF PROFITS
The movements in reserves during the years were as follows:
Collective
Surplus welfare
reserve fund Total
--------------------------
RMB RMB RMB
Balance at December 31, 1998 13,137 13,137 26,274
Appropriation for the year 278 278 556
------ ------ ------
Balance at December 31, 1999 13,415 13,415 26,830
Appropriation for the year 599 599 1,198
------ ------ ------
Balance at December 31, 2000 and 2001 14,014 14,014 28,028
====== ====== ======
In accordance with the relevant PRC regulations and the articles of
association of HARC (the "Articles of Association"), appropriations
representing 10% of the net income as reflected in its statutory
financial statements will be allocated to each of surplus reserve and
collective welfare fund.
Subject to certain restrictions set out in the relevant PRC regulations
and the Articles of Association, the surplus reserve may be distributed
in the form of share bonus issues.
In accordance with the relevant PRC regulations and the Articles of
Association, the collective welfare fund must be used for capital
expenditure on staff welfare facilities. Such facilities are for the
use of the staff and are owned by HARC.
According to relevant laws and regulations in the PRC, distributable
reserves of HARC and its subsidiaries are determined in accordance with
the relevant PRC accounting rules and regulations. The amount of
retained earnings of HARC and its subsidiaries included in the
consolidated balance sheet as of December 31, 1999 and available for
distribution was RMB76,143. HARC had no retained earnings available for
distribution as of December 31, 2000 and 2001.
F-26
CHINA RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
23. ACCUMULATED OTHER COMPREHENSIVE GAINS/(LOSSES)
The component of other comprehensive gains/(losses) is as follows:
Currency
translation
adjustments
RMB
Balance at December 31, 1998 (4)
Currency translation adjustments (14)
---
Balance at December 31, 1999 (18)
Currency translation adjustments 36
---
Balance at December 31, 2000 18
Currency translation adjustments 33
---
Balance at December 31, 2001 51
===
The earnings associated with the Group's investment in its foreign
subsidiaries are considered to be permanently invested and no provision
for U.S. federal and state income taxes on those earnings or
translation adjustments has been provided.
24. COMMITMENTS
(a) Lease commitments
At December 31, 2001, future minimum payments under
non-cancelable operating leases for the leasing of buildings
in the PRC and Hong Kong , including leases with related
parties as describes in note 18, consist of the following:
RMB
Payable in:
2002 795
2003 510
2004 510
2005 510
2006 510
Thereafter 467
-----
Total minimum lease payments 3,302
=====
Rental expenses under operating leases for the years ended
December 31, 1999, 2000 and 2001 amounted to RMB242, RMB242
and RMB1,254, respectively.
F-27
CHINA RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
24. COMMITMENTS (continued)
(b) Machinery
Pursuant to a purchase agreement dated July 10, 1999, the
Group was obligated to purchase machinery totaling RMB2,600. A
deposit of RMB1,560 was paid.
In January 2001, the purchase agreement was canceled and the
related deposit was repaid in the form of 49% of interest in a
subsidiary of the Group having a fair value of RMB901 and cash
of RMB712.
25. FOREIGN CURRENCY EXCHANGE
The RMB is not freely convertible into foreign currencies.
Effective from January 1, 1994, a single rate of exchange is quoted
daily by the People's Bank of China (the "Unified Exchange Rate").
However, the unification of the exchange rates does not imply
convertibility of RMB into US$ or other foreign currencies. All foreign
exchange transactions continue to take place either through the Bank of
China or other banks authorized to buy and sell foreign currencies at
the exchange rates quoted by the People's Bank of China.
26. RETIREMENT BENEFITS
As stipulated by the PRC regulations, the Operating Subsidiaries
participated in a defined contribution retirement plan (the "Retirement
Plan") administered by a State-owned insurance company controlled by
the Farming Bureau. The Operating Subsidiaries were required to make
contributions to the Retirement Plan at a rate of 21% of the aggregate
of basic salaries, allowances and bonuses of its existing staff. All
staff of the Operating Subsidiaries were covered under the Retirement
Plan and upon retirement, the retired staff are entitled to a monthly
pension payment borne by the above-mentioned insurance company under
the Retirement Plan. The Operating Subsidiaries were not responsible
for any payment beyond the contributions to the Retirement Plan as
noted above.
The amount of contributions paid by the Group on behalf of the
Operating Subsidiaries, which were charged to the consolidated
statements of operations, amounted to RMB262 for the year ended
December 31, 1999. As more fully described in note 3, effective January
1, 2000, the Group disposed of these operations and therefore the Group
made no contributions to the Retirement Plan in 2000 and 2001.
F-28
CHINA RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
27. VALUATION AND QUALIFYING ACCOUNTS
Provision Provision for
for doubtful inventory
accounts write-downs Total
---------------------------------------------
RMB RMB RMB
Balance at December 31, 1998 4,740 1,554 6,294
Recovery of bad debts written-off (2,902) -- (2,902)
------ ------ ------
Balance at December 31, 1999 1,838 1,554 3,392
Charged to costs and expenses -- 1,129 1,129
------ ------ ------
Balance at December 31, 2000 1,838 2,683 4,521
====== ====== ======
No provisions was made during the year ended December 31, 2001
28. SEGMENT FINANCIAL INFORMATION
The Group was principally engaged in the distribution of natural
rubber, the procurement of materials and supplies, and the distribution
of other agricultural products in the PRC for the year 1999 presented
in the consolidated financial statements.
Description of products by segment
----------------------------------
In 1999, the Group had two reportable segments: (i) rubber and (ii)
materials, supplies and other agricultural products. As more fully
described in note 3, effective January 1, 2000, the Group disposed of
these operations. The reportable segments in 2000 were supermarket
operations and processed timber. Accordingly, the segment results in
1999 were restated. The Group's materials, supplies and other
agricultural products division primarily sold materials, supplies and
other agricultural products to farms, manufacturers and other
distributors in the PRC. The Group's supermarket division primarily
sold foods and grocery products to customers in the PRC. And the
Group's timber division primarily sold processed timber wooden blocks
to manufacturers and other distributors in the PRC. As more fully
described in note 4, effective April 30, 2001, the Group disposed of
its timber processing operations.
Measurement of segment profit or loss and segment assets
--------------------------------------------------------
The Group evaluates performance and allocates resources based on profit
or loss from operations before interest, gains and losses on the
Group's investment portfolio, and income taxes. The accounting policies
of the reportable segments are the same as those described in the
summary of significant accounting policies. Intersegment sales and
transfers between reportable segments are not material to any period
presented.
Factors management used to identify the Group's reportable segments
-------------------------------------------------------------------
The Group's reportable segments are business units that offer different
products. The reportable segments are each managed separately because
they distribute distinct products.
F-29
CHINA RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
28. SEGMENT FINANCIAL INFORMATION (continued)
Operating segment information
----------------------------- Year ended December 31,
1999 2000 2001
---------------------------------------
RMB RMB RMB
Net sales:
Natural rubber:
Net sales to unaffiliated customers 442,841 -- 4,093
------- ------- -------
442,841 -- 4,093
------- ------- -------
Materials, supplies and other agricultural products:
Net sales to unaffiliated customers 9,120 306 --
Net sales to affiliates 23,718 -- --
------- ------- -------
32,838 306 --
------- ------- -------
Supermarket operations:
Net sales to unaffiliated customers 688 5,253 5,999
------- ------- -------
688 5,253 5,999
------- ------- -------
Total consolidated net sales 476,367 5,559 10,092
======= ======= =======
Depreciation and amortization expenses:
Natural rubber 723 -- --
Materials, supplies and other
agricultural products 333 280 --
Supermarket operations 7 119 143
------- ------- -------
Total segment depreciation and amortization
expenses 1,063 399 143
Reconciling item:
Depreciation and amortization expenses
attributable to corporate assets 28 3,451 7,367
------- ------- -------
Total consolidated depreciation and
amortization expenses 1,091 3,850 7,510
======= ======= =======
F-30
CHINA RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
28. SEGMENT FINANCIAL INFORMATION (continued)
Operating segment information (continued)
Year ended December 31,
1999 2000 2001
------- ------- -------
RMB RMB RMB
Segment profit/(loss):
Natural rubber 5,634 -- (157)
Materials, supplies and other
agricultural products 3,040 10 --
Supermarket operations 32 453 417
------- ------- -------
Total segment profit/(loss) 8,706 463 260
Reconciling items:
Corporate expenses (14,971) (26,341) (31,307)
Interest income 944 11,749 1,537
Interest expense (1) (73) (229)
------- ------- -------
Total consolidated loss before income taxes
and discontinued operations (5,322) (14,202) (29,739)
======= ======= =======
December 31,
2000 2001
---------------------
RMB RMB
Segment assets:
Natural rubber -- --
Materials, supplies and other
agricultural products -- --
Supermarket operations 6,416 6,895
------- -------
Total segment assets 6,416 6,895
Reconciling items:
Corporate assets 135,091 40,707
Investments 184,374 109,615
Assets of discontinued timber segment 7,303 --
------- -------
Total consolidated assets 333,184 157,217
======= =======
31
CHINA RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
28. SEGMENT FINANCIAL INFORMATION (continued)
Operating segment information (continued)
-----------------------------------------
Year ended December 31,
1999 2000 2001
-----------------------
RMB RMB RMB
Expenditure for additions to long-lived assets:
Natural rubber -- -- --
Materials, supplies and other
agricultural products 54 -- --
Supermarket operations 4,223 387 79
----- ----- -----
Total segment expenditure for
additions to long-lived assets 4,277 387 79
Reconciling item:
Corporate assets 557 2,718 586
Discontinued timber segment 1,326 3,250 --
----- ----- -----
Total consolidated expenditure for
additions to long-lived assets 6,160 6,355 665
===== ===== =====
Long-lived assets of reportable segments and corporate assets consisted
of property and equipment located in the PRC and Hong Kong.
Major customers
---------------
The Group did not have any major customers that represented more than
10% of the total consolidated net sales in 1999, 2000 and 2001.
F-32