10QSB 1 china10qsb.txt QUARTERLY REPORT SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB [X] Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarter period ended March 31, 2004 -------------- [ ] Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ___________ to _____________ CHINA RESOURCES DEVELOPMENT, INC. (Exact Name of registrant as Specified in Charter) Nevada 0-26046 87-0263643 (State or other Jurisdiction (Commission File Number) (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 (Address and telephone number of principal executive offices) 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 requirements for the past 90 days. Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 1,143,823 shares of common stock, $0.001 par value, as of May 14, 2004. FORWARD-LOOKING STATEMENTS This report contains statements that constitute forward-looking statements. Those statements appear in a number of places in this report and include, without limitation, statements regarding the intent, belief and current expectations of the Company, its directors or its officers with respect to 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 or Plan of Operation," 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. 2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CHINA RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (UNAUDITED) FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003 (Amounts in thousands, except share and per share data) Three Months Ended March 31, --------------------------------------- 2004 2003 2004 --------- ------- --------- RMB RMB US$ NET SALES 417 444 50 COST OF SALES (231) (444) (28) --------- ------- --------- GROSS PROFIT 186 -- 22 DEPRECIATION (58) (34) (7) SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (1,683) (1,935) (203) INTEREST INCOME 31 171 4 OTHER (EXPENSE)/INCOME, NET 376 (56) 45 --------- ------- --------- LOSS FROM CONTINUING OPERATIONS (1,148) (1,854) (139) DISCONTINUED OPERATIONS Income from operations of discontinued supermarket segment and loss from Xubu operations -- (583) -- --------- ------- --------- NET LOSS (1,148) (2,437) (139) --------- ------- --------- Other comprehensive loss: Foreign currency translation adjustments (4) -- -- --------- ------- --------- COMPREHENSIVE LOSS (1,152) (2,437) (139) ========== ======== ========== LOSS PER SHARE: basic and diluted Continuing operations (1.01) (2.21) (0.12) Discontinued operations -- (0.70) -- --------- ------- --------- (1.01) (2.91) (0.12) ========== ======== ========== WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 1,143,823 837,823 1,143,823 ========== ======== ========== See notes to condensed consolidated financial statements. 3 CHINA RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 2004 AND DECEMBER 31, 2003 (Amounts in thousands, except share and per share data)
March 31, December 31, March 31, 2004 2003 2004 --------- --------- -------- RMB RMB US$ Notes (Unaudited) (Note) (Unaudited) ASSETS CURRENT ASSETS: Cash and cash equivalents 9,718 10,472 1,174 Trading securities 54 598 7 Trade receivables 302 722 36 Other receivables, deposits and prepayments 1,444 182 174 Short term loans receivable 742 1,060 90 Assets held for sale 2 -- 2,088 -- --------- --------- -------- TOTAL CURRENT ASSETS 12,260 15,122 1,481 PROPERTY AND EQUIPMENT 3 1,208 1,266 146 INVESTMENTS 44,000 44,000 5,314 GOODWILL 6,296 6,296 760 --------- --------- -------- TOTAL ASSETS 63,764 66,684 7,701 ========= ========= ======== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable 74 467 9 Other payables and accrued liabilities 4 2,070 2,641 250 Amount due to an officer 1,697 1,603 205 Current portion of capital lease 154 151 19 Amounts due to related companies 296 296 35 Liabilities related to assets held for sale 2 -- 857 -- --------- --------- -------- TOTAL CURRENT LIABILITIES 4,291 6,015 518 Capital lease, net of current portion 277 321 34 --------- --------- -------- TOTAL LIABILITIES 4,568 6,336 552 --------- --------- -------- SHAREHOLDERS' EQUITY Preferred stock, authorized - 10,000,000 shares Series B preferred stock, US$0.001 par value: Authorized - 320,000 shares Issued and outstanding - 320,000 shares in 2004 and 2003 3 3 -- Common stock, US$0.001 par value: Authorized - 200,000,000 shares Issued and outstanding - 1,143,823 shares in 2004 and 2003 9 9 1 Additional paid-in capital 181,681 181,681 21,942 Reserves 28,028 28,028 3,385 Accumulated deficit (150,677) (149,529) (18,198) Accumulated other comprehensive income 152 156 19 --------- --------- -------- TOTAL SHAREHOLDERS' EQUITY 59,196 60,348 7,149 --------- --------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 63,764 66,684 7,701 ========= ========= ========
Note: The balance sheet at December 31, 2003 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. See notes to condensed consolidated financial statements. 4 CHINA RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003 (Amounts in thousands)
Three months ended March 31, ----------------------------- 2004 2003 2004 ------- ----- ------ RMB RMB US$ Net cash (used in)/provided by operating activities (1,031) 595 (124) ------- ----- ------ INVESTING ACTIVITIES Repayment of principal of capital leases (41) -- (5) Repayment of short term loans from third parties 318 -- 38 ------- ----- ------ Net cash provided by investing activities 277 -- 33 ------- ----- ------ Net cash provided by discontinued operations -- 350 -- ------- ----- ------ NET (DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS (754) 945 (91) Cash and cash equivalents, at beginning of period 10,472 2,238 1,265 ------- ----- ------ Cash and cash equivalents, at end of period 9,718 3,183 1,174 ======= ===== ======
See notes to condensed consolidated financial statements. 5 CHINA RESOURCES DEVELOPMENT, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Amounts in thousands, except per share data) 1. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-QSB and Item 310(b) of Regulation S-B. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three-month period ended March 31, 2004, are not necessarily indicative of the results that may be expected for the year ending December 31, 2004. The balance sheet at December 31, 2003 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-KSB for the year ended December 31, 2003. For the convenience of the reader, amounts in Renminbi ("RMB") have been translated into United States dollars ("US$") at the rate of US$1.00 = RMB8.28 quoted by the People's Bank of China as at March 31, 2004. No representation is made that the RMB amounts could have been, or could be, converted into US$ at that rate. Certain comparative amounts have been reclassified to conform with the current period classifications. 2. DISPOSITION OF ASSETS On February 10, 2004, the Registrant's wholly-owned subsidiary, Hainan Cihui Industrial Co. Ltd. ("HARC"), disposed of its 100% equity interest in Shenzhen Xubu Investment Co. Ltd. ("Xubu") to an unaffiliated third party for total consideration of RMB17,256 (US$2,084) (the "Purchase Consideration"). The Purchase Consideration was offset by capital in the amount of RMB16,026 (US$1,935) that had been withdrawn from Xubu by HARC. The net Purchase Consideration of RMB1,231 (US$149) was received by the Company on May 5, 2004. The assets and liabilities of Xubu have been classified as held for sale as of December 31, 2003 and consisted of fixed assets of RMB1,102 (US$133), cash of RMB812 (US$98), other receivables of RMB174 (US$21) and other payables of RMB857 (US$103). The results of operations of Xubu have been retroactively restated as discontinued operations. Revenues from discontinued Xubu operations were nil for the three months ended March 31, 2004 and 2003. Losses before income taxes from discontinued operations were nil and RMB583 (US$70) for the three months ended March 31, 2004 and 2003, respectively. 6 3. PROPERTY AND EQUIPMENT March 31, December 31, 2004 2003 --------- ------------ RMB RMB At cost: Buildings 509 509 Machinery, equipment and motor vehicles 1,050 1,050 ------ ------ 1,559 1,559 Accumulated depreciation (351) (293) ------ ------ 1,208 1,266 ====== ====== As at March 31, 2004, property and equipment included a leased motor vehicle with cost and accumulated depreciation of RMB959 (US$116) and RMB194 (US$23), respectively. 4. OTHER PAYABLES AND ACCRUED LIABILITIES March 31, December 31, 2004 2003 --------- ------------ RMB RMB Other payables 1,557 1,668 Accrued liabilities 513 973 ----- ----- 2,070 2,641 ===== ===== 5. TRADING SECURITIES Included in other income/(expenses) for the three months ended March 31, 2004 and 2003 are unrealized losses on trading securities of nil and RMB151 (US$18), respectively. 7 6. SEGMENT FINANCIAL INFORMATION Three months ended March 31, ------------------ 2004 2003 ------ ------ RMB RMB Net sales: Advertising: Net sales to unaffiliated customers 417 -- Copper: Net sales to unaffiliated customers -- 444 ------ ------ Total consolidated net sales 417 444 ====== ====== Segment profit: Advertising 154 -- Copper -- -- ------ ------ Total segment profit 154 -- Reconciling items: Corporate expenses (1,333) (2,025) Interest income 31 171 ------ ------ Total consolidated loss from continuing operations (1,148) (1,854) ====== ====== March 31, December 31, 2004 2003 ------ ------ RMB RMB Segment assets: Advertising 407 779 Copper 2,046 942 ------ ------ Total segment assets 2,453 1,721 Reconciling items: Corporate assets 17,311 20,963 Investments 44,000 44,000 ------ ------ Total consolidated assets 63,764 66,684 ====== ====== 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION NET SALES AND GROSS PROFIT Sales for the three months ended March 31, 2003 represented trading of copper of RMB444,000 (US$54,000) with zero gross profit margin. Sales for the three months ended March 31, 2004 represented revenues from advertising and public relations services of RMB417,000 (US$50,000) with gross profit margin of 45%. Net sales from supermarket operations included in discontinued operations totaled RMB1,758,000 (US$212,000) for the three months ended March 31, 2003. Profit from discontinued supermarket operations was reported net of income tax expense, if any. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses decreased by RMB252,000 (US$30,000) or 13% to RMB1,683,000 (US$203,000) for the three months ended March 31, 2004 from RMB1,935,000 (US$234,000) for the three months ended March 31, 2003. The decrease was primarily attributable to the write off of VAT receivables of RMB389,000 (US$47,000) in the first quarter of 2003. INTEREST INCOME, NET Interest income decreased by RMB140,000 (US$17,000) or 82% to RMB31,000 (US$4,000) for the three months ended March 31, 2004 from RMB171,000 (US$21,000) for the three months ended March 31, 2003. The decrease was primarily due to the decrease in short term loans to unaffiliated third parties. OTHER (EXPENSE)/INCOME, NET Other (expense)/income, net for the three months ended March 31, 2003 and 2004 primarily consisted of a net gain/(loss) on trading of marketable securities of (RMB59,000) (US$7,000) and RMB376,000 (US$46,000), respectively. INCOME TAXES It is management's intention to reinvest all income attributable to the Company earned by its operations outside the US. Accordingly, no US corporation income taxes are included in these consolidated financial statements. Under the current laws of the BVI, dividends and capital gains arising from the Company's investments in the BVI are not subject to income taxes and no withholding tax is imposed on payments of dividends to the Company. LIQUIDITY AND CAPITAL RESOURCES The Company's primary liquidity needs are to fund operating expenses and to expand business operations. The Company has financed its working capital requirements primarily through internally generated cash. Net cash used in operating activities for the three months ended March 31, 2004 was approximately RMB1,031,000 (US$124,000), as compared to net cash provided by operating activities of RMB595,000 (US$72,000) for the corresponding period in 2003. Net cash inflows/outflows from the Company's operating activities are attributable to the Company's net loss and changes in operating assets and liabilities. Net cash provided by investing activities for the three months ended March 31, 2004 was primarily attributable to repayments of short term loans from third parties. 9 The following summarizes the Company's financial condition and liquidity at the dates indicated: March 31, 2004 December 31, 2003 -------------- ----------------- Current ratio 2.8x 2.5x Working capital 7,969,000 9,107,000 Ratio of long-term debt to total shareholders' equity 0.05x 0.05x The Company has the following contractual obligations and commercial commitments as at March 31, 2004: Total < 1 year 2-5 years ----- -------- --------- Operating leases 56,000 48,000 8,000 Capital lease 431,000 154,000 277,000 Except as disclosed above, there have been no other significant changes in financial condition and liquidity since the fiscal year ended December 31, 2003. The Company believes that internally generated funds will be sufficient to satisfy its anticipated working capital needs for at least the next twelve months. OFF BALANCE SHEET ARRANGEMENTS The Company has no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors. 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: 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. There can be no assurance that these measures will be successful. o The PRC does not have a comprehensive system of laws and enforcement of existing laws may be uncertain and sporadic, and the implementation and interpretation thereof inconsistent. 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. Decided legal cases are without binding legal effect, although judges are often guided by prior decisions. The interpretation of PRC laws may be subject to policy changes reflecting domestic political changes, and new laws, changes to existing laws and the pre-emption of local regulations by national laws may adversely affect foreign investors. The activities of the Company's subsidiaries in China are subject to PRC regulations governing PRC companies. In particular, the realization of the Company's future plans in China will also be subject to PRC government approvals. o The Company's revenues and expenses are mainly denominated in HK$ and US$. The Company and its subsidiaries do not have material market risk with respect to currency fluctuation as HK$ is linked to US$. As the reporting currency of the Company's consolidated financial statements is in RMB, translation difference may arise on consolidation. The Company may also suffer exchange loss when it converts RMB to other currencies, such as the Hong Kong Dollar or United States Dollar. 10 o The Company's interest income is sensitive to changes in the general level of HK$ and US$ interest rates. In this regard, changes in HK$ and US$ interest rates affect the interest earned on the Company's cash equivalents. At March 31, 2004, the Company's cash equivalents are primarily HK$ or US$ 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 them. GENERAL RISKS OF 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 investment opportunities, including 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 At March 31, 2004, the Company had short-term investments in trading securities in the Hong Kong stock market with a total market value of RMB54,000 (US$7,000). 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. 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 We do not intend to pay dividends for the foreseeable future - we intend to reinvest earnings from operations, if any, back into our operations. The payment of dividends is subject to numerous restrictions imposed under PRC law. 11 ITEM 3. CONTROLS AND PROCEDURES On May 14, 2004, the Company's management concluded its evaluation of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Disclosure controls and procedures are controls and procedures designed to reasonably assure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, such as this Annual Report, is recorded, processed, summarized and reported within the time periods prescribed by SEC rules and regulations, and to reasonably assure that such information is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. The Company's management, including the Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures will prevent all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system's objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. As of the evaluation date, the Company's Chief Executive Officer and its Chief Financial Officer concluded that the Company maintains disclosure controls and procedures that are effective in providing reasonable assurance that information required to be disclosed in the Company's reports under the Exchange Act is recorded, processed, summarized and reported within the time periods prescribed by SEC rules and regulations, and that such information is accumulated and communicated to the Company's management, including its Chief Executive Officer and its Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the evaluation date. 12 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS: On June 17, 2003, Billion Luck Company Limited, initiated a lawsuit in the High Court of the Hong Kong Special Administrative Region, Court of First Instance (the "High Court"), under the caption "Billion Luck Company Limited and Lee Kwong Yin." Billion Luck sought to recover approximately RMB2,667,000 (US$322,085), plus interest at the rate of 10% from May 27, 2003, arising out of the defendant's default under a loan agreement and related promissory note in favor of Billion Luck. The defendant failed to file a defense to the action and Billion Luck sought a judgment by default. On August 12, 2003, the High Court adjudged that the defendant pay to Billion Luck approximately US$322,085 due to the defendant's default under the loan agreement and promissory note. On November 12, 2003, a bankruptcy petition against Lee Kwong Yin was filed with the High Court based on his failure to satisfy a Statutory Demand served upon him on August 27, 2003. On March 1, 2004, the High Court ordered that a bankruptcy order be granted against Lee Kwong Yin. The Company is unable to predict whether it will be able to collect upon the award of the Court. ITEM 2. CHANGES IN SECURITIES: NONE ITEM 3. DEFAULTS UPON SENIOR SECURITIES: NONE ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS: NONE ITEM 5. OTHER INFORMATION: NONE ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K: 10.1 Purchase and Sale Agreement dated February 10, 2004 between HARC and Su Wei Min re: disposition of Shenzhen Xubu Investment Co., Ltd.(1) 10.2 Purchase and Sale Agreement dated February 10, 2004 between Li Fei Lie and Su Wei Min re: disposition of Shenzhen Xubu Investment Co. Ltd.(2) 31.1 CEO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 CFO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 CEO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 CFO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. ----------------- (1) Incorporated by reference to Exhibit 10.18 to the registrant's Current Report on Form 8-K filed February 25, 2004. (2) Incorporated by reference to Exhibit 10.19 to the registrant's Current Report on Form 8-K filed February 25, 2004. During the three months ended March 31, 2004, the Company filed one current report on Form 8-K on February 10, 2004, to report, under Item 2, the disposal of the 100% equity interest in Xubu for net consideration of Rmb1,230,090 (US$148,562) and, under Item 7, pro forma financial information required by Regulation S-X. 13 SIGNATURES Pursuant to the requirements 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. May 14, 2004 By:/s/ Ching Lung Po -------------------------------------- Ching Lung Po, Chief Executive Officer By:/s/ Tam Cheuk Ho ------------------------------------- Tam Cheuk Ho, Chief Financial Officer 14