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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933
CHINA PEREGRINE FOOD CORPORATION
------------------------------------------------------
(Name of Small Business Issuer in its Amended Charter)
Delaware 0-20549 62-1681831
- ---------------------------- ----------- ----------------
(State or other jurisdiction File Number (I.R.S. Employer
of incorporation or Identification No.)
organization)
11300 US Highway 1, Suite 202, North Palm Beach, Florida 33408 USA
------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Telephone number: (561) 625-1411
--------------
Roy D. Toulan, Jr., Esquire
Stibel & Toulan, LLP
183 State Street
Boston, Massachusetts 02109
(617) 523-6000
-------------------
(Name, address and telephone number of agent for service)
Approximate date of proposed sale to the public: From time to time after the
effective date of this Registration Statement.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ] ______
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ] ______
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities
Act registration number of the earlier effective registration statement for
the same offering. [ ] ______
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Title of each Proposed Proposed
class of Number of maximum maximum
securities Securities Dollar amount offering aggregate Amount of
to be to be to be price offer registration
registered registered registered per unit (3) price (2)(3) fee
- ------------- ---------- ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Common Stock, 2,461,804 (2) $6,474,544 $2.63 $6,474,544 $1,800
$.001 par value
per share (1)
<FN>
<F1> (1) Common Stock issued upon conversion of Series D Convertible
Preferred Stock, dividends payable in connection therewith, and
the exercise of Warrants issued in connection therewith. The
issue of Series D Convertible Preferred Stock took place pursuant
to a Subscription Agreement, dated March 8, 1999.
<F2> (2) Pursuant to Rule 416 under the Securities Act of 1933, also
includes an indeterminate number of additional shares of Common
Stock that may become issuable to prevent dilution resulting from
stock splits, stock dividends and conversion price or exercise
price adjustments.
<F3> (3) Estimated solely for the purpose of calculating the registration
fee pursuant to Rule 457(c) under the Securities Act of 1933, as
amended, based upon the average closing bid prices of the
Company's Common Stock on the NASD OTC Bulletin Board for the
five trading days ending April 14, 1999.
</FN>
</TABLE>
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
<PAGE> (ii)
PROSPECTUS
Information contained herein is subject to completion or amendment. A
registration statement relating to the resale of these securities has been
filed with the Securities and Exchange Commission. These securities may not
be sold nor may offers to buy be accepted prior to the time the registration
statement becomes effective. This prospectus shall not constitute an offer
to sell or the solicitation of an offer to buy nor shall there be any sale
of these securities in any state which such offer, solicitation or sale
would be unlawful prior to registration or qualification under the
securities law of any such state.
CHINA PEREGRINE FOOD CORPORATION
2,461,804 SHARES (1)
OF
COMMON STOCK
(PAR VALUE $.001 PER SHARE)
This Prospectus covers the resale of up to 2,461,804 (Two Million Four
Hundred Sixty-One Thousand, Eight Hundred Four)1 shares (the "Shares") of
the Common Stock, par value $.001 per share (the "Common Stock"), of China
Peregrine Food Corporation (the "Company"). These Shares are being offered
for resale from time to time on behalf of Austinvest Anstalt Balzers,
Esquire Trade & Finance, Inc., Amro International, S. A., and Settondown
Capital International, Ltd. (sometimes being collectively referred to
herein as the "Purchaser" or the "Selling Shareholders") or, subject to
applicable law, their by pledges, donees, distributes, transferees or other
successors in interest. See "Selling Shareholders." The Company has been
advised that the Selling Shareholders expect to offer the Shares for resale
from time to time in accordance with the "Plan of Distribution" set forth
herein. See "Plan of Distribution." The closing bid price of the Company's
Common Stock on the NASD OTC Bulletin Board on April 14, 1999 was $2.25 per
share.
The Shares are held by the Selling Shareholders and are authorized for
issuance by the Company pursuant to and as a result of the (i) conversion of
certain shares of the Company's 6% Series D Convertible Preferred Stock
having an aggregate Stated Value in the amount of $1,000,000 (the "Series D
Shares" or the "Series D Stock") and the payment of dividends thereon; and
(ii) the exercise of Warrants to purchase an aggregate amount of 150,000
shares of Common Stock at an exercise price of $2.96 per share held by the
Selling Shareholders (the "Warrants"). The Series D Shares were issued by
the Company, as well as the shares of the Company's Common Stock issuable
upon conversion of the Series D Shares and upon exercise of the Warrants, in
connection with a private offering of the Shares for an aggregate of
$1,000,000 (the "Private Offering") concluded with the Purchaser under a
Subscription Agreement, dated March 8, 1999, between the Purchaser and the
Company (the "Purchase Agreement").
The 2,461,804 (Two Million Four Hundred Sixty-One Thousand, Eight Hundred
Four) shares issued upon conversion of the Convertible Preferred Stock,
including dividends, and the exercise of the Warrants, all as part of the
Private Offering, are being registered for resale pursuant to the terms and
conditions of the Subscription Purchase Agreement, dated March 8, 1999,
between the Company and the Purchaser. The number of Shares registered
assumes an approximate 200% reserve for an indeterminate number of
additional shares of Common Stock that may be issued upon the conversion of
Series D Shares, the payment of dividends, upon fluctuations in the stated
Conversion Price, and the exercise of the Warrants and Commission Covenants.
- -------------------
<F1> (1) Includes an indeterminate number of shares of Common Stock that
may become issuable to prevent dilution resulting from stock
splits, stock dividends and conversion price of exercise price
adjustments, which are included pursuant to Rule 416 promulgated
under the Securities Act of 1933.
<PAGE> 1
The Company received approximately $470,000 in net proceeds from the Private
Offering of Series D Stock, after deduction of fees and other expenses, and
up to an additional $500,000 in proceeds upon the filing of this
registration statement and the effectiveness of same. In addition the
Company may receive up to an additional $444,000 from the exercise of the
Warrants. All of the proceeds from the resale of any of the Shares being
offered pursuant to this Prospectus will inure to the benefit of the Selling
Shareholders and none of such proceeds will be for the benefit of the
Company. The Selling Shareholders will bear all discounts and commissions
paid in connection with resale of the Shares. The Company will not bear any
fees or expenses of the Selling Shareholders but will bear all of the
expenses of the registration of the Shares.
The Selling Shareholders may effect such resale transactions by selling the
Shares to or through broker-dealers and such broker-dealers may receive
compensation in the form of discounts, concessions or commissions from the
Selling Shareholders or the purchasers of the Shares for whom such broker-
dealers may act as agent or to whom they resell as principal or both (which
compensation to a particular broker-dealer might be in excess of customary
commissions).
THE BUSINESS OF THE COMPANY AND AN INVESTMENT IN THE SHARES ARE SUBJECT TO
CERTAIN RISKS INCLUDING, WITHOUT LIMITATION, THE RISKS SET FORTH IN THE
SECTION ENTITLED "RISK FACTORS."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Prospectus is April 16, 1999.
SMALL BUSINESS ISSUER
The Company is a Small Business Issuer, as that term is defined in Item 10,
Regulation S-B.
AVAILABLE INFORMATION
As of the filing of the Registration Statement of which this Prospectus is a
part, the Company has filed all required periodic reports with the
Securities and Exchange Commission (the "SEC") pursuant to Section 12(g) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act").
Assuming that the required capitalization of the Company and per share
trading price for the Company's Common Stock can be realized, the Company
intends to register its Common Stock with the NASDAQ SmallCap Stock Market
("NASDAQ") As of the date of this Prospectus, however, the Company has not
made its application for such registration and there can be no assurance
that it will be approved for listing on NASDAQ. Information that is
incorporated by reference in this Prospectus will be provided, free of
charge, upon written request specifying the information sought, directed to
the Company's executive offices located at 11300 U.S. Highway 1, Suite 202,
North Palm Beach, Fl 33408. The Company's telephone number at that address
is (561) 625-1411.
<PAGE> 2
TABLE OF CONTENTS
PROSPECTUS SUMMARY 4
RISK FACTORS 8
USE OF PROCEEDS 10
DETERMINATION OF OFFERING PRICE 11
SELLING SHAREHOLDERS 11
PLAN OF DISTRIBUTION 12
LEGAL PROCEEDINGS 13
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS 14
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 17
DESCRIPTION OF SECURITIES 20
INTEREST OF NAMED EXPERTS AND COUNSEL 27
DISCLOSURE OF COMMISSION POSITION OF INDEMNIFICATION
FOR SECURITIES ACT LIABILITIES 27
ORGANIZATION WITH THE LAST FIVE YEARS 27
THE BUSINESS OF THE COMPANY 33
MANAGEMENT DISCUSSION AND ANALYSIS OF OPERATIONS 41
DESCRIPTION OF PROPERTY 50
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 50
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 52
EXECUTIVE COMPENSATION 55
FINANCIAL STATEMENTS F-1
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 59
<PAGE> 3
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information, including "RISK FACTORS" and the Financial Statements of the
Company and the Notes thereto, appearing elsewhere in this Prospectus. The
discussion in this Prospectus contains forward-looking statements that
involve risks and uncertainties. The Company's actual results could differ
materially from those discussed herein. Factors that could cause or
contribute to such differences include, but are not limited to, those
discussed in "RISK FACTORS," "MANAGEMENT DISCUSSION AND ANALYSIS OF
OPERATIONS" and "THE BUSINESS OF THE COMPANY" as well as those discussed
elsewhere in this Prospectus.
THE COMPANY
China Peregrine Food Corporation is a Delaware corporation formed on April
26, 1996. Presently, the Company owns the controlling interest in a Sino-
American joint venture in China known as Green Food Peregrine Children's
Food Co. Ltd. ("Green Food Peregrine"). Green Food Peregrine is in the
business of processing and distributing dairy and non dairy food products in
the People's Republic of China and, at present, owns and operates a dairy
processing plant in Shanghai. Green Food Peregrine is an equity joint
venture with registered capital of US $5,000,000 and established under the
law of the People's Republic of China on July 3, 1993. The equity interest
of Green Food Peregrine presently is divided among the Company (70%) and its
Chinese partner, China National Green Food Corporation ("China National
Green Food") (30%). Consistent with the national scope of the Green Food
Peregrine joint venture, China National Green Food is wholly owned by the
Ministry of Agriculture of the People's Republic of China.
The business focus of Green Food Peregrine is providing milk and non-
carbonated beverages in China through the development and utilization of
advanced food technology and western-style marketing expertise. Currently,
Green Food Peregrine is manufacturing and distributing dairy products in
Shanghai and is in the process of developing a number of new and non-
carbonated beverages for infants and school age children. Green Food
Peregrine intends to establish processing facilities and operate in cities
with a population of more than two million throughout China.
From April of 1993, through March 5, 1997, the majority equity interest in
Green Food Peregrine was owned by China Peregrine Enterprises, Limited
("China Peregrine Enterprises"), a Texas limited partnership created for the
sole purpose of controlling the operation of the Green Food Peregrine joint
venture business. The Green Food Peregrine joint venture company was formed
pursuant to a Joint Venture Contract and Articles of Association, dated
April 13, 1993, by and among China National Green Food, China Peregrine
Enterprises, and Amer-China Partners Ltd. ("Amer-China"). Pursuant to the
Joint Venture Contract and the Articles of Association for Green Food
Peregrine, China Peregrine Enterprises was required to invest US $3,000,000
as its share of the joint venture's registered capital, with an initial
investment of US $720,000. Subsequent to the initial investments by the
respective parties, the Articles of Association were amended to reflect an
additional capital contribution by China Peregrine Enterprises, so that it
ultimately obtained a 70% interest in Green Food Peregrine.
As part of a March 5, 1997 asset purchase transaction between the Company
and China Peregrine Enterprises, the Company contributed approximately US
$1,200,000 to the registered capital of Green Food Peregrine, satisfying the
requirements of both the Green Food Peregrine Joint Venture Contract and
<PAGE> 4
the Articles of Association, for the payment of the final installment of the
registered capital. In addition to the satisfaction of this capital
requirement, the Ccmpany issued 1,040,000 shares of its common stock to
China Peregrine Enterprises in consideration for the asset purchase.
On October 1, 1997, the Company and Amer-China executed an agreement for the
transfer of Amer-China's contract rights and equity interest in Green Food
Peregrine to the Company. The consideration for this transfer was 120,000
shares of the Company's common stock. With the approval of this transfer by
the Ministry of Foreign Trade and Economic Cooperation, the Company's equity
interest in Green Food Peregrine increased from 67.6% to 70%.
On May 2, 1998, the Company approved and ratified an agreement between the
Company and China National Green Food for the increase of the Company's
equity interest in Green Food Peregrine from 70% to 76.92%. This change in
the ownership ratio will take place upon the payment of an additional US
$1,500,000 in registered capital by the Company over the next eighteen
months. Since Chinese government regulations require approval of this
change of the investment ratio by the Ministry of Foreign Trade and Economic
Cooperation, the Company has agreed to an interim loan of US $500,000 to
Green Food Peregrine, with the conversion of that loan to registered capital
upon obtaining the required governmental approval.
On September 3, 1997 and June 28, 1998, respectively, the Company executed
agreements to acquire a 52% interest in Hangzhou Meilijian Dairy Products
Co., Ltd., ("Hangzhou Meilijian") from American Flavors China, Inc.
("American Flavors China"), a Delaware corporation. American Flavors China
is controlled by Noam and Florence Sender. Prior to this transaction, the
Senders had no affiliation with the Company. The remaining 48% of Hangzhou
Meilijian is owned by Hangzhou Dairy Co., a controlled entity of the
regional Chinese government. On July 31, 1998, the Board of Directors of
Hangzhou Meilijian approved the acquisition. The acquisition transaction is
subject to formal approval by the regional government agency. That
governmental approval process presently is pending. In the interim period,
the operational control of Hangzhou Meilijian has been transferred to the
Company pursuant to a principal/agent agreement with American Flavors China,
effective July 31, 1998. The Company, with the cooperation of its Chinese
partner and American Flavors China, has installed a new management team to
run the day to day operation of that dairy facility.
RISK FACTORS
In addition to the other information contained in this Prospectus,
prospective purchasers of the Shares should consider carefully the
discussion RISK FACTORS contained on page 7 to 9 of this Prospectus. The
risks of investment in the Shares include the following factors:
The Company began its current operations in 1994 and has a limited history
of operations. There can be no assurance that management of the Company will
be successful in attaining sufficient revenues to meet its expenses or to
achieve or maintain profitability.
The Company may have the need to seek additional financing or to materially
curtail its expansion plans. There can be no assurance that such financing
will be available to the Company on satisfactory
<PAGE> 5
terms or at all. Failure to obtain such financing could materially affect
the Company's ability to increase sales and sustain its operations.
The Company may be required or may choose to sell equity securities to
obtain financing in the future including the sale of additional securities
of the Company to the Selling Shareholders. If the Company sells
additional equity securities at a price less than the purchase price
hereunder, investors purchasing shares of Common Stock in this offering
would incur additional dilution.
The Company will be dependent on its current management team for the
foreseeable future. The loss of the services of any member of the
management team could have a material adverse effect on the operations and
prospects of the Company. At this time, the Company has no employment
agreements with any of these individuals. The Company does not currently
have any "key man" life insurance on any of its employees.
The Company has paid no dividends on its Common Stock to date, nor does it
anticipate doing so in the foreseeable future. The Company intends to use
all proceeds of any financing activities and all cash proceeds, if any, from
operations to finance the growth of the Company's sales and to repay debt.
There has to date been a limited market for the Common Stock. Sale of
substantial numbers of the Shares in the market may have a depressive effect
on the market price of the Company's Common Stock. Such depressive effect
could reduce the price per share of the Common Stock below that required for
initial and/or continued listing of the Company's Common Stock for trading
on NASDAQ or a national stock exchange.
The Company intends to apply to list its Common Stock for trading on a
national stock exchange. If the Company is not successful in listing its
Common Stock for trading on such exchange and if the price per share of the
Common Stock on the NASD OTC Bulletin Board continued to be traded at below
$5.00 per share, the Common Stock would most likely come within the
definition of "penny stock," as contained in certain rules and regulations
of the SEC. If an exception from the penny stock rules were not available
for the Common Stock, the ability of purchasers in this Offering to sell any
shares of Common Stock in the market could be impeded and could have a
material adverse effect on the liquidity of the Common Stock, materially
increasing the risk of an investment in the Shares.
The Company's Articles of Incorporation and By-Laws contain certain
provisions eliminating the liability of directors to the Company for
monetary damages to the fullest extent allowed under the laws of the State
of Delaware, which under certain circumstances could eliminate liability for
such directors' breach of their fiduciary duty to the Company and its
shareholders.
THE OFFERING
Common Stock offered by
the Selling Shareholders 2,461,804; Includes an indeterminate number
of shares of Common Stock that may become
issuable to prevent dilution resulting from
stock splits, stock dividends and
conversion price or exercise price
adjustments, which
<PAGE> 6
are included pursuant to Rule 416
promulgated under the Securities Act of
1933.
Common Stock to be outstanding
after the offering. There are currently 7,795,462 shares of
Common Stock issued and outstanding. A
total of 150,000 shares of Common Stock are
reserved for issuance pursuant to the
exercise of the Warrants and Commission
Warrants. The remaining Shares to be
offered for resale pursuant to this
Prospectus are to be outstanding as a
result of the conversion of the Series D
Shares, which may occur from time to time,
and the payment of dividends. As the
conversion prices of the Preferred Stock
and the Debenture are to be determined by
reference to the market price of the Common
Stock at the time of conversion, it is not
possible to determine at this time the
number of Shares that will actually be
offered or the number of Shares to be
outstanding after the completion of the
Offering.
Pursuant to respective registration rights
contained in the Convertible Preferred
Stock Purchase Agreement, the number of
shares offered hereby assumes a 200%
reserve for an indeterminate number of
additional shares of Common Stock that may
be issued upon the conversion of the
Preferred Shares and the payment of
dividends on such Preferred Shares, based
upon fluctuations in the stated Conversion
Prices and the exercise of Warrants and
Commission Warrants, the total number of
shares of the Company's Common Stock issued
and outstanding could be 10,257,266, if
(a) all Series D Shares were converted, (b)
dividends were paid in shares of Common
Stock for a two year period, and (c) all
of the Warrants are exercised.
Use of Proceeds The Company will not receive any proceeds
of the resales of the Shares being offered
pursuant to this Prospectus, all of which
will be paid to the Selling
Shareholders. The Company received
approximately $480,000 in net proceeds of
the Private Offering and up to an
additional $500,000 in proceeds upon the
filing of this registration statement and
the effectiveness of same. In addition the
Company may receive up to an additional
$444,00 from the exercise of the Warrants
and Commercial Warrants.
Trading Symbol for the
Common Stock on the NASD
OTC Bulletin Board: CHPF
<PAGE> 7
RISK FACTORS
Prospective purchasers of the Shares offered for resale pursuant to this
Prospectus should consider carefully all of the information set forth or
incorporated by reference in this Prospectus and, in particular, should
evaluate the following risks in connection with an investment in the Shares.
LIMITED OPERATING HISTORY
The current business of the Company commenced in 1994. Prior to that time,
the Company had no operations upon which an evaluation of the Company and
its prospects could be based. There can be no assurance that management
of the Company will be successful in completing the Company's product
development programs, implementing the corporate infrastructure to support
operations at the levels called for by the Company's business plan, conclude
a successful sales and marketing plan to attain significant penetration of
the market or that the Company will generate sufficient revenues to meet its
expenses or to achieve or maintain profitability.
In the period of operations commencing in 1997 through December 1998 the
Company had sales of $3,600,909. As of December 31, 1998 the Company had an
accumulated deficit of $7,031,046.
NEED FOR ADDITIONAL FINANCING; DILUTION
While the Company has been successful to date in raising sufficient
investment capital to support its marketing and development efforts, there
can be no assurance that additional financing will not be necessary or that
such other financing would be available to the Company on satisfactory terms
or at all. Failure to obtain such financing could materially slow the
Company's production and impair its ability to increase sales and sustain
profitability.
The Company may be required or may choose to sell equity securities to
obtain financing in the future including the sale of additional preferred
stock of the Company to the Selling Security holders. If the Company sells
additional equity securities at a price per share less than the purchase
price hereunder, investors purchasing shares of Common Stock in this
offering would incur additional dilution. See "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF OPERATIONS."
DEPENDENCE ON KEY PERSONNEL
The Company will be dependent on its current management team for the
foreseeable future. The loss of the services of any member of the
management team could have a material adverse effect on the operations and
prospects of the Company. At this time, the Company has no employment
agreements with any of these individuals. The Company does not currently
have any "key man" life insurance on any of its employees.
INDEMNIFICATION AND LIMITATION OF LIABILITY
The Company's Articles of Incorporation and By-Laws include provisions that
eliminate the personal liability of the directors of the Company for
monetary damages to the fullest extent possible under the laws of the State
of Delaware or other applicable law. These provisions eliminate the
liability of directors to
<PAGE> 8
the Company and its stockholders for monetary damages arising out of any
violation of a director of his fiduciary duty of due care. Under Delaware
law, however, such provisions do not eliminate the personal liability of a
director for (i) breach of the director's duty of loyalty, (ii) acts or
omissions not in good faith or involving intentional misconduct or knowing
violation of law, (iii) payment of dividends or repurchases of stock other
than from lawfully available funds, or (iv) any transaction from which the
director derived an improper benefit. These provisions do not affect a
director's liabilities under the federal securities laws or the recovery of
damages by third parties.
LIMITED MARKET FOR THE COMMON STOCK
In November of 1997, the Company's Common Stock began trading in the over-
the-counter market as quoted on the National Association of Securities
Dealers OTC Bulletin Board and now trades under the new trading symbol
"CHPF." Prior to that time there was no public market for the Company's
Common Stock. Since it has begun trading, there has been a limited inter-
dealer market for the Common Stock. Assuming the Company can meet the
minimum listing requirements, the Company intends to apply for a listing of
its Common Stock on NASDAQ. There can be no assurance, however, that the
Company will meet the listing requirements of such exchange or that its
Common Stock will be approved for trading on such exchange. In addition,
sales of substantial numbers of the Shares into the existing inter-dealer
market could have a depressive effect on the market price of the Company's
Common Stock. Such depressive effect could keep the price per share of the
Common Stock below that required for initial listing of the Company's Common
Stock for trading on such exchange. There can be no assurance that a broader
market for the Common Stock will develop subsequent to this Offering.
Failure of such a market to develop could have a material adverse effect on
the liquidity of the Common Stock and, therefore, on an investment in the
Shares. This would significantly increase the risks of such an investment.
POTENTIAL RISKS OF LOW PRICED STOCKS
If the Company is not successful in listing its Common Stock on NASDAQ and
if the price per share of the Common Stock on the NASD OTC Bulletin
continues to trade at below $5 per share, the Common Stock would most likely
come within the definition of "penny stock," as contained in certain rules
and regulations of the SEC. Under those regulations, any broker-dealer
seeking to effect a transaction in a penny stock not otherwise exempt from
the rules must first deliver to the potential customer a standardized risk
disclosure document in a form prepared by the SEC which provides information
about penny stocks and the nature and level of risks in the penny stock
market.
The broker-dealer must also provide the customer with current bid and offer
quotations for the penny stock, the compensation of the broker-dealer and
its salespersons in the transaction and monthly account statements showing
the market value of each penny stock held in the customer's account. This
information must be given to the customer orally or in writing before the
transaction and in writing before or with delivery of the customer's
confirmation of the transaction. Under the penny stock rules, the broker-
dealer must make a special determination of the suitability of the suggested
investment for the individual customer and must receive the customer's
written consent to the transaction. If an exception from the penny stock
rules were not available for the Common Stock and it were to come within the
penny stock rules, the penny stock rules could have the effect of limiting
the trading market for the Common Stock and the ability of purchasers in
this Offering to sell any shares of Common Stock in the market. If the
trading market for the
<PAGE> 9
Common Stock were so limited, it could have an adverse effect on the
liquidity of the Common Stock and could have the effect of materially
increasing the risks of an investment in the Shares.
FUTURE SALES OF COMMON STOCK OR SENIOR SECURITIES
Current shareholders of the Common Stock own all of the 7,795,462 shares of
Common Stock issued and outstanding prior to this Offering. The conversion
of the Preferred Shares and the issuance of dividends and the issuance of
Common Stock pursuant to the exercise of Warrants and Commission Warrants
could have the effect of depressing the market price of the Company's Common
Stock. While the Company cannot predict the impact of the public resale
into the market of any of such shares on the public trading price of the
Company's Common Stock, sales of substantial amounts of such shares of
Common Stock or the availability of substantial amounts of such shares for
sale could adversely affect prevailing market prices.
The Company anticipates that the Selling Shareholders may offer for resale
all of the shares of Common Stock issuable upon conversion of the Preferred
Shares (and the issuance of dividends thereunder) and exercise of the
Warrants. Because it is possible that a significant number of such Shares
could be resold at the same time, such sales, or the possibility thereof,
may have a depressive effect on the market price of the Company's Common
Stock.
USE OF PROCEEDS
The Company previously received approximately $470,000 in net proceeds from
the Private Offering and and up to an additional $500,000 in proceeds upon
the filing of this registration statement and the effectiveness of same. In
addition the Company may receive up to an additional $444,000 from the
exercise of the Warrants and Commission Warrants. All Shares offered by
this Prospectus are being re-sold by the Selling Shareholders and all
proceeds of the sales of such Shares will inure to the benefit of the
Selling Shareholders. No proceeds of this Offering will inure to the
benefit of the Company.
CONTINUING OPERATING LOSSES
As reflected in the accompanying financial statements, the Company has
incurred substantial net losses in the past two years. In 1997, the Company
had a net loss applicable to Common Shares of $2,163,638 representing a net
loss per common share of $(0.59). In 1998, the net loss increased to
$2,577,446, representing a net loss per common share $(.041).
SIGNIFICANT COMPETITION
The sale of dairy products, in large urban areas of the Peoples' Republic of
China, is a highly competitive business. The Company faces practical
competition from both local and large producers of dairy products, which
producers may enjoy long term relationships with local food stores and food
store chains. These competitors may be better financed and benefit from an
enhanced distribution system when compared to that employed by the Company.
The ability of such competition to sell dairy products at prices below
prices charged by the Company for its products may represent an obstacle to
the Company's ability to secure a market share at revenue levels sufficient
to achieve profitability.
<PAGE> 10
DETERMINATION OF OFFERING PRICE
The offering price has been determined by reference to over-the-counter
trading on the NASD OTC Electronic Bulletin Board, since October 24, 1997.
These quotations for Common Stock transactions on the OTC Bulletin Board
reflect inter-dealer prices, without retail mark-up, mark-down or
commissions and may not represent actual transactions.
SELLING SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of Common Stock by the Selling Stockholders as of April 12, 1999,
and the number of shares of Common Stock covered by this Prospectus.
<TABLE>
<CAPTION>
Number of Shares
Number of Shares of Number of Shares of Common Stock
Common Stock Beneficially Common Stock Offered Beneficially Owned
Owned Prior to this Offering(1)(4) Hereby(2)(4) Following Offering(3)
---------------------------------- -------------------- ---------------------
Name and Address
Of Stockholder # of Shares % of Class # of Shares % of Class
- ---------------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
AUSTINVEST ANSTALT BALZERS 202,657 2.38% 777,887 7.58%
(A Liechtenstein corporation)
Landstrasse 938
9494 Furstentums
Balzers, Liechtenstein
ESQUIRE TRADE & FINANCE INC. 202,657 2.38% 777,887 7.58%
(A B.V.I. corporation)
Trident Chambers
P.O. Box 146
Road Town, Tortola, B.V.I.
AMRO INTERNATIONAL, S.A. 218,050 2.56% 837,725 8.16%
(A Panama corporation)
c/o Ultra Finanz
Grossmuenster Platz 26
P.O. Box 4401
Zurich, Switzerland CH 8022
SETTONDOWN CAPITAL 68,305 0.0844% 68,305 0.66%
INTERNATIONAL, LTD.
600 California Street, 14th Floor
San Franciso, CA 94108
<FN>
<F1> (1) Includes (i) the number of shares of Common Stock issuable upon
the conversion of the Series D Shares at ane initial Conversion
Price of $1.91 per share (which price will fluctuate from time to
time based upon changes in the market price of the Common Stock
and provisions in the formula for determining conversion price),
(ii) the number of shares of Common Stock issuable upon the
exercise of Warrants held such Selling Shareholder. The Series
D Shares and Warrants were issued by the Company to the Selling
Stockholders in March of 1999, in a transaction exempt from the
registration requirements of the Securities Act of 1933 pursuant
to Regulation D thereunder (the "Private Placement").
<F2> (2) In order to provide for (i) fluctuations in the market price of
the Common Stock, (ii) provisions in the formula for determining
the respective conversion prices of the Series D Shares, provided
for in the terms thereof (see "Description of Securities") and
(iii) shares of Common Stock which may be issued in payment of
dividends on the Series D Shares, the aggregate number of shares
of Common Stock registered
<PAGE> 11
hereby exceeds the aggregate number of such shares issuable
upon conversion of the Series D Shares at the conversion prices
in effect on the date hereof.
<F3> (3) Assumes the sale of all shares offered herein.
<F4> (4) The Selling Shareholders have agreed to restrict its ability to
convert the Preferred Stock, and the Warrants to the extent
that the number of shares of Common Stock held by it and its
affiliates after such conversion and/or exercise will not exceed
9.999% of the then issued and outstanding shares of Common Stock
following such conversion and/or exercise.
</FN>
</TABLE>
PLAN OF DISTRIBUTION
Sales of Shares may be made from time to time by the Selling Shareholders
or, subject to applicable law, by pledgees, donees, distributees,
transferees or other successors in interest. Such sales may be made on
NASDAQ, in the over-the-counter market, on a national securities exchange
(any of which may involve crosses and block transactions), in privately
negotiated transactions or otherwise or in a combination of such
transactions at prices and at terms then prevailing or at prices related to
the then current market price, or at privately negotiated prices. In
addition, any Shares covered by this Prospectus which qualify for sale
pursuant to Section 4(1) of the Securities Act, or Rule 144 promulgated
thereunder may be sold under such provisions rather than pursuant to this
Prospectus. Without limiting the generality of the foregoing, the Shares
may be sold in one or more of the following types of transactions: (a) a
block trade in which the broker-dealer so engaged will attempt to sell the
Shares as agent but may position and resell a portion of the block as
principal to facilitate the transaction; (b) purchases by a broker or dealer
as principal and resale by such broker or dealer for its account pursuant to
this Prospectus; (c) an exchange distribution in accordance with the rules
of such exchange; (d) ordinary brokerage transactions and transactions in
which the broker solicits purchasers; (e) face-to-face transactions between
sellers and purchasers without a broker-dealer; (f) short sales; and (g) a
combination of such methods of sale. In effecting sales, brokers or dealers
engaged by the Selling Shareholders may arrange for other brokers or dealers
to participate in the resales.
In connection with distributions of the Shares or otherwise, the Selling
Shareholders may enter into hedging transactions with broker-dealers. In
connection with such transactions, broker-dealers may engage in short sales
of the Shares registered hereunder in the course of hedging the positions
they assume with Selling Shareholders. The Selling Shareholders may also
sell Shares short and deliver the Shares to close out such short positions.
Broker-dealers may agree with the Selling Shareholders to sell a specified
number of such Shares at a stipulated price per share, and, to the extent
such broker-dealer is unable to do so acting as agent for a Selling
Shareholder, to purchase as principal any unsold Shares at the price
required to fulfill the broker-dealer commitment to the Selling
Shareholders. Broker-dealers who acquire Shares as principal may thereafter
resell such Shares from time to time in transactions (which may involve
block transactions and sales to and through other broker-dealers, including
transactions of the nature described above) in the over-the-counter market
or otherwise at prices and on terms then prevailing at the time of sale, at
prices then-related to the then-current market price or in negotiated
transactions and, in connection with such resales, may pay to or receive
from the purchasers of such Shares commissions as described above. The
Selling Shareholders may also sell the Shares in accordance with Rule 144
under the Securities Act, rather than pursuant to this Prospectus.
<PAGE> 12
Brokers, dealers or agents may receive compensation in the form of
commissions, discounts or concessions from Selling Shareholders in amounts
to be negotiated in connection with the sale. Such brokers or dealers and
any other participating brokers or dealers may be deemed to be
"underwriters" within the meaning of the Securities Act in connection with
such sales and any such commission, discount or concession may be deemed to
be underwriting discounts or commissions under the Securities Act.
From time to time the Selling Shareholders may engage in short sales, short
sales against the box, puts and calls and other transactions in securities
of the Company or derivatives thereof, and may sell and deliver the Shares
in connection therewith or in settlement of securities loans. If the
Selling Shareholders engage in such transactions, the Conversion Price may
be affected. From time to time the Selling Shareholders may pledge their
Shares pursuant to the margin provisions of its customer agreements with its
brokers. Upon default by the Selling Shareholders, the broker may offer and
sell the pledged Shares from time to time.
Information as to whether underwriters who may be selected by the Selling
Shareholders, or any other broker-dealer, are acting as principal or agent
for the Selling Shareholders, the compensation to be received by
underwriters who may be selected by the Selling Shareholders, or any broker-
dealer, acting as principal or agent for the Selling Shareholders and the
compensation to be received by other broker-dealers, in the event the
compensation of such other broker-dealers is in excess of usual and
customary commissions, will, to the extent required, be set forth in a
supplement to this Prospectus (the "Prospectus Supplement"). Any dealer or
broker participating in any distribution of the Shares may be required to
deliver a copy of this Prospectus, including the Prospectus Supplement, if
any, to any person who purchases any of the Shares from or through such
dealer or broker.
To comply with the securities laws of certain jurisdictions, if applicable,
the Shares will be offered or sold in such jurisdictions only through
registered or licensed brokers or dealers. In addition, in certain
jurisdictions the Shares may not be offered or sold unless they have been
registered or qualified for sale in such jurisdictions or any exemption from
registration or qualification is available and is complied with.
All expenses of the registration of the Shares under the Securities Act and
applicable state securities laws, if required, will be paid by the Company,
including, without limitation, SEC filing fees and expenses of compliance
with state securities or "blue sky" laws, if any, printing expenses, fees
and disbursements of counsel for the Company, and reasonable expenses of one
counsel for all of the Selling Shareholders; provided, however, that the
Selling Shareholders will pay all underwriting discounts and selling
commissions, if any. The Selling Shareholders will be indemnified by the
Company against certain civil liabilities, including certain liabilities
under the Securities Act, arising from or relating to any untrue statement
or alleged untrue statement of any material fact contained in the
registration statement of which this prospectus is contained, this
prospectus, or any amendment or supplement thereto, or the omission or
alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances in which they were made, not misleading.
LEGAL PROCEEDINGS
There currently are no claims or lawsuits against the Company or its
subsidiaries. The Company, however, may become involved in litigation and
claims arising in the ordinary course of its business.
<PAGE> 13
DIRECTORS, EXECUTIVE OFFICERS,
PROMOTERS AND CONTROL PERSONS
The directors, executive officers and significant employees/advisors of the
Company as of April 12, 1999 are as follows. Directors of the Company serve
for staggered terms of two years or until their successors are elected.
Officers are appointed by, and serve at the pleasure of, the Board.
Charles Beech Chairman, CEO and Director
Roy G. Warren President and Director
Susan Lurvey Treasurer and Secretary
Michael Davis Chief Financial Officer
Robert Cummings Director
Paul Downes Director
George Holdsworth Director
Michael Lucci Director
John McCormack Director
Phillip Pearce Director
Mr. Charles Beech, Chairman, Chief Executive Officer and Director, Age 56.
Term expires 2000
Mr. Beech has a background of senior level management experience within a
variety of industries including: consumer products, emerging growth high
technology, merchant banking and sales and marketing consulting firms. Mr.
Beech has over 25 years of experience in executive level management, sales
and marketing, consumer product research and development. As former
President of Maybelline Sales Corporation, and following a 17-year career in
management with Procter & Gamble, Mr. Beech negotiated with the Chinese
government to establish the Green Food Peregrine Children's Food Company
joint venture alliance with the Ministry of Agriculture, one of the Chinese
joint venture businesses presently run by the Company. Mr. Beech also
serves as Chairman, CEO and President of Peregrine Enterprises, Inc., a
multi-national corporation which is parent to several consumer market
research firms in the United States and in China, including Message Factors,
Inc., an international consumer market research company which is currently
ranked (by revenues) in the top 2% of the U.S. market research industry.
Mr. Beech is one of the "founders" of the Company as it presently exists.
Mr. Robert Cummings, Director, Age 56.
Term expires 1999
Mr. Cummings' work experience includes ten years in purchasing at Ford Motor
Company. In 1975, he founded and currently operates J & J Production
Service, Inc., a manufacturing representative business, which is currently
responsible for over $300 million in annual sales.
Mr. Michael L. Davis, Chief Financial Officer, Age 65.
Entering the securities industry over 35 years ago as a securities and
special situations analyst with ValueLine, Mr. Davis proceeded to serve as a
Tactical Planner, General Portfolio Manager and Short Sale Portfolio Manager
with a number of hedge funds. In 1972, he was a member of the Investment
Committee at Anchor Corp. which supervised its $2.5 billion family of funds,
as well as serving as Anchor's Chief Market Analyst. From 1978 through 1989,
Mr. Davis was the Portfolio Manager of Merrill Lynch's
<PAGE> 14
Special Value Fund. In addition to his position with China Peregrine, Mr.
Davis operates a private consulting firm, M.L. Davis Financial Services,
which advised clients on stock selection and general market timing
considerations, research and writing of special reports on selected small
and mid-cap growth companies and in the supervision of an investment
portfolio for a group of United Arab Emirates investors.
Mr. Paul Downes, Director, Age 37.
Term expires 2000
Mr. Downes currently is a director of the Company and, until his resignation
in April, 1998, served as Chairman of the Company. For the past 10 years,
Mr. Downes has managed a diverse portfolio of international investments with
concentration in the United Kingdom, Eastern Europe, North Africa and Asia.
In 1985, he founded a group of nursing homes for the elderly in Great
Britain that he sold in 1990. Prior to that time, Mr. Downes spent several
years organizing golf tournaments and international golf matches in
Malaysia, Singapore, Thailand, Philippines, Indonesia and Hong Kong,
spending two years living in Southeast Asia. Mr. Downes is one of the
founders" of the Company as it presently exists
Mr. George Holdsworth, Director, Age 60.
Term expires 1999
Until May, 1998, Mr. Holdsworth was responsible for the operational aspects
of the Company's Chinese operations. Mr. Holdsworth is a graduate of the
University of London with a B.S. in Mathematics and an Associate of the
London College of Music. He started in business as a manufacturing manager
in his father's company, Earlsdon Components, Ltd., where he became Director
of Operations, then owner and Managing Director. In 1993, Mr. Holdsworth
became owner of Earlsdon Technology, Ltd., a JV Partner of Shanghai Earlsdon
Valve Company, Ltd., and has lived in Shanghai for the last four years,
until May, 1998. Mr. Holdsworth sold his interest in Shanghai Earlsdon and
commenced his duties for the Company in March, 1997.
Michael Lucci, Director, Age 58.
Term expires 1999
Mr. Lucci is a former All Pro linebacker who played for the Detroit Lions of
the National Football League from 1964 through his retirement from
professional football in 1973. Mr. Lucci became associated with Bally's
Total Fitness Corporation in 1971 and rose through the ranks to become that
corporation's Vice President of club operations in the mid-west, Senior
Vice-President, and President and Chief Operating Officer in 1993. Mr.
Lucci retired in 1996 and, since that time, has managed a diverse investment
portfolio for himself.
Mr. John McCormack, Director, Age 40.
Term expires 2000
Mr. McCormack filled the directorship vacated by Mr. Dale Reese in the
summer of 1997. For over 15 years, Mr. McCormack served as an executive with
Dean Foods Co., a processor and distributor of a full line of branded and
private label products, including fluid milk, cottage cheese and ice cream.
In 1996 and 1997, Mr. McCormack served as Vice President of Sales and
Marketing for Dean Food's McArthur Dairy in Miami, Florida. Currently, as a
Vice President of Dean Foods, he is in charge of Dean Food's mid-western
division out of Chicago, Illinois.
Mr. Phillip Pearce, Director, Age 69.
<PAGE> 15
Term expires 1999
Mr. Pearce is a "retired" member of the securities industry. Mr. Pearce
served as Chairman of the NASD during which time he was instrumental in the
founding of NASDAQ. Additionally, Mr. Pearce was a former Director of E.F.
Hutton and has served as Governor of the New York Stock Exchange. Since his
retirement in 1988, Mr. Pearce has remained active in the securities
industry as a corporate financial consultant.
Mr. Roy G. Warren, President and Director, Age 43.
Term expires 2000
Mr. Warren has been in charge of the day to day US operations of the Company
since the summer of 1997. In addition to his day to day operational duties,
Mr. Warren continues to develop strategy for the Company in growth and
external financial matters. From 1981 through 1996, Mr. Warren enjoyed an
active career in the securities brokerage industry. During 1995 and 1996,
Mr. Warren was a Registered Representative of a satellite office of
Southeast Research Partners, Boca Raton, Florida. From 1992 to 1994, he was
a Partner of Laffer Warren & Company, a small independent broker dealer,
registered with the NASD, located in North Palm Beach, Florida. During the
period from 1987 to 1992, Mr. Warren was a an executive officer, principal,
securities broker, and partner with Gulfstream Financial Association, a
subsidiary of Kemper Financial Companies, and later as Vice President-Sales,
of Alex Brown & Sons, West Palm Beach, Florida.
As of August 31, 1998, there were no family relationships among the
directors and executive officers. Further, no director, executive officer,
promoter or control person has been involved in any legal proceedings during
the past five years that are material to an evaluation of the ability or
integrity of such director, person nominated to become a director, executive
officer, promoter or control person of the Company. None of the individuals
listed in this Item 5 has had a bankruptcy petition filed by or against any
business of which such person was a general partner or executive officer
either at the time of such bankruptcy, if any, or within two years prior to
that time. No director, executive officer, promoter or control person was
or has been convicted in a criminal proceeding or is subject to a pending
criminal proceeding or subject to any order, judgment, or decree, not
subsequently reversed, suspended or vacated, of any court of competent
jurisdiction, permanently or temporarily enjoining, borrowing, or otherwise
limiting his or her involvement in any type of business, securities or
banking activities. No director, executive officer, promoter or control
person has been found by a court of competent jurisdiction in a civil action
to have violated federal or state securities or commodities law.
<PAGE> 16
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
(a) The following individuals hold 5 % or more of the outstanding voting
stock of the Company. No other individual or any group is known to the
Company to be the beneficial owner of more than 5% of any class of the
Company's voting securities.
<TABLE>
<CAPTION>
Title of Name & Address of (2) Amount & Nature of (3) Percent of (4)
Class (1) Beneficial owner Beneficial Owner Class
- --------- --------------------- ---------------------- --------------
<S> <C> <C> <C>
Common Mr. Dale Reese 3,157,985 22.75%
125 Kingston Road
Media, PA 19063
Common American Flavors China, Inc. 1,531,685 11.03%
1007 Chestnut Street
Newton, MA 02164
Common Tamarind Management., Ltd. 2,202,327 15.87%
31 Broad Street
P.O. Box 23
St. Helier Channel Islands
Common Peregrine Enterprises, Inc. 1,070,914 7.71%
5350 Poplar Avenue
Memphis, TN 38119
<FN>
<F1> (1) While listed as "common," the class of stock includes the shares
of common stock underlying warrants, options and convertible
preferred stock issued by the Company.
<F2> (2) Insofar as Mr. Paul Downes has investment power with respect to
the affairs of Tamarind Management, Ltd., the Company's
securities held by Mr. Downes and Tamarind are combined in this
table. Similarly, insofar as Mr. Charles Beech has investment
power with respect to the affairs of Peregrine Enterprises, Inc.,
the Company's securities held by Mr. Beech and Peregrine
Enterprises are combined in this table.
<F3> (3) The following is a breakdown, by beneficial owner and title of
class, of the common stock issued and common stock underlying
warrants, options and convertible preferred stock which the
respective holders have the right to acquire within sixty (60)
days:
<CAPTION>
Number of Shares of
Common Stock (Issued
Holder Type of Security or Capable of Being Acquired)
- ------ ---------------- -----------------------------
<S> <C> <C>
Mr. Dale Reese Common 840,544
Warrants 100,000
Series A Convertible Pref. 500,000
Series B Convertible Pref. 1,017,441
Options 700,000
Tamarind Common 687,000
Management, Ltd. Series B Convertible Pref. 107,440
Options 1,383,705
<PAGE> 17
Mr. Paul Downes Common 24,182
Peregrine
Enterprises, Inc. Common 360,000
Mr. Charles Beech Common 200,000
Options 510,914
<F1> (1) Includes issued shares of common stock plus the shares of common
stock underlying warrants, options and convertible preferred
stock issued by the Company, which can be acquired within sixty
(60) days.
</FN>
</TABLE>
(b) The following includes all who served as directors or executive officers
in 1997 and 1998, who hold equity securities of the Company and the total
held by all directors and executive officers. This table includes issued
shares of common stock plus the shares of common stock underlying warrants,
options and convertible preferred stock issued, which can be acquired within
sixty (60) days, as above.
<TABLE>
<CAPTION>
Title of Name & Address of Amount & Nature of Percent of
Class Beneficial Owner Beneficial Owner(1) Class
- -------- ----------------- ------------------- ----------
<S> <C> <C> <C>
Common Mr. Dale Reese 3,157,985 22.75%
125 Kingston Road
Media, PA 19063
Common Mr. Paul Downes 2,202,327 15.87%
(Director)
5646 Windrift Lane
Boca Raton, FL 33433
Common Mr. Charles Beech 1,070,914 7.71%
(Chairman/CEO/Director)
4339 Gwynne Road
Memphis, TN 38117
Common Roy G. Warren 598,914 4.31%
(President/Director)
1128 Country Club Road
N. Palm Beach, FL 33408
Common Robert Cummings 400,000 2.88%
(Director)
2829 N.E. 44th Street
Lighthouse Point, FL 33064
Common Michael G. Lucci 410,000 2.73%
(Director)
49 Spanish River Drive
Ocean Ridge, FL 33435
Common John McCormack 200,000 1.44%
(Director)
8750 South Grant
Burridge, IL 60521
<PAGE> 18
Common Phillip Pearce 25,000 0.18%
(Director)
6624 Glenleaf Court
Charlotte, NC 28270
Common Michael L. Davis 25,000 0.18%
(CFO)
20 Harris Avenue
Hamptom Beach, NH 03843
Common Susan Lurvey 12,000 0.086%
(Treasurer/Secretary)
6340 Fox Run Circle
Jupiter, FL 33458
Common All directors and executive 4,914,155 35.40%
officers as a group
<FN>
<F1> (1) The following is a breakdown, by beneficial owner and title of
class, of the common stock issued and common stock underlying
warrants, options and convertible preferred stock which the
respective holders have the right to acquire within sixty (60)
days:
<CAPTION>
Number of Shares of
Common Stock (Issued
Holder Type of Security or Capable of Being Acquired)
- ------ ---------------- ----------------------------
<S> <C> <C>
Mr. Dale Reese Common 840,544
Warrants 100,000
Series A Convertible Pref. 500,000
Series B Convertible Pref. 1,017,441
Options 700,000
Tamarind Common 687,000
Management, Ltd. Series B Convertible Pref. 107,440
(c/o Mr. Paul Downes) Options 1,383,705
Mr. Paul Downes Common 24,182
(Individually)
Peregrine
Enterprises, Inc. Common 360,000
(c/o Mr. C. Beech)
Mr. Charles Beech Common 200,000
(Individually) Options 510,914
Roy G. Warren Common 188,000
Options 410,914
Robert Cummings Common 200,000
Warrants 200,000
Michael G. Lucci Common 210,000
Warrants 200,000
<PAGE> 19
John McCormack Common 100,000
Warrants 100,000
Phillip Pearce Common 25,000
Michael L. Davis Options 25,000
Susan Lurvey Common 12,000
</FN>
</TABLE>
(c) There currently are no arrangements that may result in a change of
ownership or control of the Company.
DESCRIPTION OF SECURITIES
The Company is authorized by its charter to issue a maximum of 20,000,000
shares of Common Stock, having a par value of $0.001 per share, and
5,000,000 shares of Preferred Stock, also having a par value of $0.001 per
share. The Company has made four designations of Preferred Stock: 500,000
shares of Series A Preferred Stock, having a par value of $0.001; 1,260,000
shares of Series B Preferred Stock, having a par value of $0.001 and a
Stated Value of $1.00 per share; 400,000 shares of Series C Convertible
Preferred Stock, having a par value of $0.001 and a Stated Value of $3.00
per share; and 117,000 shares of Series D Convertible Preferred Stock,
having a par value of $0.001 and a Stated Value of $10.00 per share The
following sets forth the number of currently issued and outstanding Shares
of Common Stock, Series A Preferred Stock, Series B Preferred Stock, Series
C Convertible Preferred Stock, and Series C Convertible Preferred Stock as
of April 1, 1999 All such stock is fully paid and nonassessable.
<TABLE>
<S> <C>
Common Stock 7,795,462
Preferred Stock (Series A) 500,000
Preferred Stock (Series B) 1,260,000
Convertible Preferred Stock (Series C) issued 133,334
Convertible Preferred Stock (Series C) outstanding after
conversion 58,715
Convertible Preferred Stock (Series D) issued 53,500
</TABLE>
COMMON STOCK
The following is a summary of certain rights and provisions of the shares of
the Company's Common Stock. This summary includes all of the material rights
and provisions of these shares. This summary does not purport to be
complete, however, and is qualified in its entirety by reference to the
Articles of Organization of the Company and to the General Corporation Law
of the State of Delaware.
Dividend Rights
- ---------------
The holders of Common Stock are entitled to receive, pro rata, such
dividends and other distributions as and when declared by the Company's
Board of Directors out of the assets and funds legally available therefor.
The availability of funds to the Company is dependent upon dividends or
distribution of profits from its subsidiaries, and may be subject to
regulatory control and approval by the appropriate government authorities on
either a regional or national level in the People's Republic of China.
<PAGE> 20
Voting Rights
- -------------
The holders of Common Stock are entitled to one vote per share on all
matters presented for a shareholder vote. There is no provision for
cumulative voting. The business of the Company is controlled by a Board of
Directors. This Board is elected by a majority vote of the shareholders, and
bylaws have been adopted for the guidance and control of the Company.
Amendments to the bylaws can be effected by majority vote of the Board of
Directors. The effective vote of the holders of a majority of the
outstanding shares of the voting stock of the Company (Common Stock, Series
A and Series B Preferred Stock) is required for mergers, consolidations or
other similar transactions.
Liquidation Rights
- ------------------
Subject to the rights of the holders of the Series A and Series B Preferred
Stock, upon the voluntary or involuntary dissolution, liquidation, or
winding up or the affairs of the Company, after the payment in full of its
debts and other liabilities, the remainder of its assets, if any, are to be
distributed pro rata among the holders of shares of Common Stock. Subject to
any required regulatory approvals, the directors of the Company, at their
discretion, may authorize and issue debt obligations, whether or not
subordinated, without prior approval of the shareholders, thereby further
depleting the liquidation value of the shares of Common Stock.
Preemptive Rights
- -----------------
Owners of Common Stock of the Company do not have the preemptive right to
purchase additional shares offered by the Company in the future. That is,
the Company may sell additional shares of Common Stock to particular
shareholders or to non-shareholders without first offering each then current
shareholder the right to purchase the same percentage of such newly offered
shares as is the shareholder's percentage of the then outstanding shares of
the Company's Common Stock.
Redemption
- ----------
The Company does not have the discretionary right to redeem its Common
Stock.
PREFERRED STOCK
Series A Convertible Preferred Stock consisting of 500,000 shares.
Dividends
- ---------
Series A Convertible Preferred Stock shall pay or accrue dividends only to
the extent that dividends are declared by the Board of Directors with
respect to the Common Stock of the Corporation, out of the assets and funds
legally available therefor. The availability of funds to the Company is
dependent upon dividends or distribution of profits from its subsidiaries,
and may be subject to regulatory control and approval by the appropriate
government authorities on either a regional or national level in the
People's Republic of China.
<PAGE> 21
Voting
- ------
Voting rights of the Series A Convertible Preferred Stock shall be equal to
and same as that attributable to the Common Stock of the Corporation and
shall be non-cumulative.
Conversion
- ----------
Series A Convertible Preferred Stock is convertible anytime after December
31, 1997 to the Common Stock of the Corporation at the fixed ratio of one
share of Common Stock for one share of Series A Convertible Preferred Stock
surrendered for conversion (Conversion Ratio).
Adjustments to Conversion Ratio
- -------------------------------
The Conversion Ratio for Series A Convertible Preferred Stock shall be
proportionally increased or reduced to reflect: (1) effectuation of a
division of the Common Stock of the Corporation or a combination thereof;
(2) capital reorganization or reclassification or distribution to the
holders of Common Stock of stock, debt securities or other assets of the
Corporation; (3) a legal merger, consolidation, corporate combination, share
exchange, or a sale or lease of substantially all of the assets of the
Corporation resulting in the distribution to the holders of Common Stock of
the Corporation, stock, debt securities or other assets of the Corporation;
(4) the issuance or sale of common stock, options, warrants or other rights
to purchase the Common Stock of the Corporation for less than the stated
value.
Liquidation Preference
- ----------------------
Holders of Series A Convertible Preferred Stock shall be entitled to receive
for each share of Series A Convertible Preferred Stock a cash payment equal
to the par value ($0.001) of such stock. If the assets of the Corporation
are insufficient for the Corporation to make such payment, the assets of the
Corporation shall be distributed ratably to the holders of the Series A
Convertible Preferred Stock.
Liquidation
- -----------
Upon any liquidation, dissolution or winding up of the Corporation, whether
voluntary or involuntary, the holders of the Series A Convertible Preferred
Stock shall be entitled to receive for each share of Series A Convertible
Preferred Stock their Liquidation Preference in addition to whatever rights
such holders may have, by operation of law or otherwise, to share in the
liquidation value of the Corporation.
Series B Convertible Preferred Stock consisting of 1,260,000 shares.
Dividends
- ---------
Series B Convertible Preferred Stock shall pay or accrue dividends at the
rate of 9% per annum, payable only upon liquidation or redemption, as a
percentage of the Stated Value ($1.00 per share) of the Series B Convertible
Preferred Stock, out of the assets and funds legally available therefor. The
availability of funds to the Company is dependent upon dividends or
distribution of profits from its subsidiaries, and may be subject to
regulatory control and approval by the appropriate government authorities on
either a regional or national level in the People's Republic of China.
<PAGE> 22
Voting Rights
- -------------
Non cumulative; voting rights of the Series B Convertible Preferred Stock
shall be equal to and same as that attributable to the Common Stock of the
Corporation.
Conversion
- ----------
Series B Convertible Preferred Stock is convertible anytime after December
31, 1997 to the Common Stock of the Corporation at the fixed ratio of one
share of Common Stock for one share of Series B Convertible Preferred Stock
surrendered for conversion (Conversion Ratio).
Adjustments to Conversion Ratio
- -------------------------------
The Conversion Ratio for Series B Convertible Preferred Stock shall be
proportionally increased or reduced to reflect: (1) effectuation of a
division of the Common Stock of the Corporation or a combination thereof;
(2) capital reorganization or reclassification or distribution to the
holders of Common Stock of stock, debt securities or other assets of the
Corporation; (3) a legal merger, consolidation, corporate combination, share
exchange, or a sale or lease of substantially all of the assets of the
Corporation resulting in the distribution to the holders of Common Stock of
the Corporation, stock, debt securities or other assets of the Corporation;
(4) the issuance or sale of common stock, options, warrants or other rights
to purchase the Common Stock of the Corporation for less than the stated
value.
Liquidation Preference
- ----------------------
Holders of Series B Convertible Preferred Stock shall be entitled to receive
for each share of Series B Convertible Preferred Stock a cash payment equal
to the Stated Value of such stock plus all accrued dividends. If the assets
of the Corporation are insufficient for the Corporation to make such
payment, the assets of the Corporation shall be distributed ratably to the
holders of the Series B Convertible Preferred Stock.
Liquidation
- -----------
Upon any liquidation, dissolution or winding up of the Corporation, whether
voluntary or involuntary, the holders of the Series B Convertible Preferred
Stock shall be entitled to receive for each share of Series B Convertible
Preferred Stock an amount equal to the Stated Value plus all accrued
dividends attributable to each such share.
Redemption
- ----------
The Corporation shall have the right in its sole discretion to redeem any or
all of the outstanding shares of Series B Convertible Preferred Stock at a
redemption price equal to the Stated Value of the Series B Convertible
Preferred Stock redeemed plus accumulated dividends for such redeemed
shares.
<PAGE> 23
Series C Convertible Preferred Stock consisting of 400,000 shares.
Dividends
- ---------
Series C Convertible Preferred Stock shall pay or accrue dividends at the
rate of 8% per annum, as a percentage of the Stated Value ($3.00 per share)
of the Series C Convertible Preferred Stock, payable in cash or Common Stock
quarterly, at the option of the Company. Accrued dividends shall be payable
upon conversion or redemption. The availability of funds to the Company is
dependent upon dividends or distribution of profits from its subsidiaries,
and may be subject to regulatory control and approval by the appropriate
government authorities on either a regional or national level in the
People's Republic of China.
Voting Rights
- -------------
Except as otherwise provided and as otherwise required by law, the Series C
Convertible Preferred Stock shall have no voting rights, except as provided
in the General Corporation Law of Delaware. So long as any shares of Series
C Convertible Preferred Stock are outstanding, however, the Company shall
not (a) alter or change adversely the powers, preferences or rights given to
the Series C Convertible Preferred Stock, (b) alter or amend this
Certificate of Designation, (c) authorize or create any class of stock
ranking as to dividends or distribution of assets upon a Liquidation or
otherwise, which class ranking is senior to the Series C Convertible
Preferred Stock, (d) amend its certificate of incorporation, bylaws or other
charter documents so as to affect adversely any rights of any holders, (e)
increase the authorized number of shares of Series C Convertible Preferred
Stock and (f) enter into any agreement with respect to the foregoing,
without the affirmative vote of the holders of a majority of the shares of
the Series C Convertible Preferred Stock then outstanding.
Conversion
- ----------
Series C Convertible Preferred Stock is convertible to the Common Stock of
the Company at a per share Conversion Price based upon the lesser of (a)
75% of the average Per Share Market Price on the date of the applicable
Holder Conversion Notice or (b) $3.00 per share. The number of shares of
common stock issuable upon conversion of each share of Series D Preferred
Stock shall equal (i) the sum of (A) the Stated Value per share and (B) at
the holder's election accrued and unpaid dividends on such share, divided by
(ii) the conversion price.
Adjustments to Conversion Price
- -------------------------------
If the Company, at any time while any shares of Series C Convertible
Preferred Stock are outstanding, shall (a) pay a stock dividend or otherwise
make a distribution or distributions on shares of its Junior Securities
payable in shares of Common Stock, (b) subdivide outstanding shares of
Common Stock into a larger number of shares, (c) combine outstanding shares
of Common Stock into a smaller number of shares, or (d) issue by
reclassification of shares of Common Stock any shares of capital stock of
the Company, the Conversion Price shall be multiplied by a fraction of which
the numerator shall be the number of shares of Common Stock (excluding
treasury shares, if any) outstanding before such event and of which the
denominator shall be the number of shares of Common Stock outstanding after
such event. Any such adjustment shall become effective immediately after
the record date for the determination of stockholders entitled to receive
such dividend or distribution and shall become effective immediately after
the effective date in the case of a subdivision, combination or
reclassification.
<PAGE> 24
Liquidation Preference
- ----------------------
Upon any liquidation, dissolution or winding-up of the Company, whether
voluntary or involuntary, but subject to the Liquidation rights of the
holders of Series A and Series B Convertible Preferred Stock, the holders of
Series C Convertible Preferred Stock shall be entitled to receive out of the
assets of the Company, whether such assets are capital or surplus, for each
share of Series C Convertible Preferred Stock an amount equal to the Stated
Value plus all accrued but unpaid dividends per share, whether declared or
not, before any distribution or payment shall be made to the holders of any
Junior Securities, and if the assets of the Company shall be insufficient to
pay in full such amounts, then the entire assets to be distributed to the
holders of Series C Convertible Preferred Stock shall be distributed among
the holders of Series C Convertible Preferred Stock ratably in accordance
with the respective amounts that would be payable on such shares if all
amounts payable thereon were paid in full.
Redemption
- ----------
The Company shall have the right, at the Company's option, to redeem all or
a portion of the Series C Convertible Preferred Stock at a price per share
equal to the sum of (a) the Stated Value and (b) a sum equal to ten percent
(10%) of the Stated Value, computed on a simple interest, non-compounded,
and non-annualized basis.
Series D Convertible Preferred Stock consisting of 115,000 shares.
Dividends
- ---------
Each share of Series D Convertible preferred stock entitles the holder to
receive or accrue dividends at the rate of 6% simple interest per annum, as
a percentage of the Stated Value ($10.00 per share) of the Series D
Convertible Preferred Stock, which is payable in cash or common stock
quarterly at the Company's option. The payment of dividends shall be made
first to the Series D Convertible preferred stockholders before dividends or
other distributions are made on any common stock, Series A Preferred Stock,
Series B Preferred Stock or Series D Preferred Stock. The availability of
funds to the Company is dependent upon dividends or distribution of profits
from its subsidiaries, and may be subject to regulatory control and approval
by the appropriate government authorities on either a regional or national
level in the People's Republic of China.
Voting Rights
- -------------
Except as otherwise provided and as otherwise required by law, the Series D
Convertible Preferred Stock shall have no voting rights, except as provided
in the General Corporation Law of Delaware. So long as any shares of Series
D Convertible Preferred Stock are outstanding, however, the Company shall
not (a) alter or change adversely the powers, preferences or rights given to
the Series D Convertible Preferred Stock, (b) alter or amend this
Certificate of Designation, (c) authorize or create any class of stock
ranking as to dividends or distribution of assets upon a Liquidation or
otherwise, which class ranking is senior to the Series D Convertible
Preferred Stock, (d) amend its certificate of incorporation, bylaws or other
charter documents so as to affect adversely any rights of any holders, (e)
increase the authorized number of shares of Series D Convertible Preferred
Stock and (f) enter into any agreement with respect to the foregoing,
without the affirmative vote of the holders of a majority of the shares of
the Series D Convertible Preferred Stock then outstanding.
<PAGE> 25
Conversion
- ----------
The holders of Series D Convertible Preferred stock shall be entitled to
convert such stock into the Company's common stock at any time subsequent to
the 91st day after issuance of such stock or upon the effectiveness of an
SB-2 registration statement for the resale of the common stock underlying
the Series D Convertible Preferred stock. The number of shares of common
stock issuable upon conversion of each share of Series D Preferred Stock
shall equal (i) the sum of (A) the Stated Value per share and (B) at the
holder's election accrued and unpaid dividends on such share, divided by
(ii) the conversion price. The conversion price shall be equal to the
lessor of: (i) 100% of the average of the closing bid price of the Company's
common stock for the trading day immediately preceding the date of issuance
of the shares of Series D Preferred Stock to the holders; or (ii) 80% of the
average of the three lowest closing bid prices for the 22 trading days
immediately preceding the conversion of the respective shares of Series D
Preferred Stock.
Adjustments to Conversion Price
- -------------------------------
If the Company, at any time while any shares of Series D Convertible
Preferred Stock are outstanding, shall (a) pay a stock dividend or otherwise
make a distribution or distributions on shares of its Junior Securities
payable in shares of Common Stock, (b) subdivide outstanding shares of
Common Stock into a larger number of shares, (c) combine outstanding shares
of Common Stock into a smaller number of shares, or (d) issue by
reclassification of shares of Common Stock any shares of capital stock of
the Company, the Conversion Price shall be multiplied by a fraction of which
the numerator shall be the number of shares of Common Stock (excluding
treasury shares, if any) outstanding before such event and of which the
denominator shall be the number of shares of Common Stock outstanding after
such event. Any such adjustment shall become effective immediately after
the record date for the determination of stockholders entitled to receive
such dividend or distribution and shall become effective immediately after
the effective date in the case of a subdivision, combination or
reclassification.
Liquidation Preference
- ----------------------
Upon any liquidation, dissolution or winding-up of the Company, whether
voluntary or involuntary, the holders of Series D Convertible Preferred
Stock shall be entitled to receive out of the assets of the Company, whether
such assets are capital or surplus, for each share of Series D Convertible
Preferred Stock an amount equal to the Stated Value plus all accrued but
unpaid dividends per share, whether declared or not, before any distribution
or payment shall be made to the holders of any Junior Securities, including
the holders of common stock, Series A, Series B and Series C Convertible
Preferred Stock, and if the assets of the Company shall be insufficient to
pay in full such amounts, then the entire assets to be distributed to the
holders of Series D Convertible Preferred Stock shall be distributed among
the holders of Series D Convertible Preferred Stock ratably in accordance
with the respective amounts that would be payable on such shares if all
amounts payable thereon were paid in full.
Redemption
- ----------
From and after 40 days after the Effective Date of the Registration
Statement for the resale of the common stock underlying the Series D
Convertible Preferred stock s the Company will have the option of redeeming
the Series D Preferred Stock by paying to the holder a sum of money equal to
the Closing Bid Price of the common stock on the date notice of redemption
is given to a holder, multiplied by the number of shares of common stock
that would be issued upon conversion of the designated amount of Stated
Value of Series D Preferred Stock being redeemed and the dividends accrued
thereon, at the Conversion Price that would
<PAGE> 26
be in effect on the Redemption Date but in no event may the Redemption
Amount be less than 120% of the Stated Value of the Series D Preferred Stock
being redeemed plus the dollar amount of accrued dividends on the Series D
Preferred Stock being redeemed.
INTEREST OF NAMED EXPERTS AND COUNSEL
Certain legal matters in connection with the registration of the Shares were
passed upon by Roy D. Toulan, Jr., Esquire, Stibel & Toulan, LLP counsel to
the Company.
DISCLOSURE OF COMMISSION POSITION
OF INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
The Company's Amended and Restated Certificate of Incorporation and By-Laws
contain provisions eliminating the personal liability of a director to the
Company and its stockholders for certain breaches of his or her
fiduciary duty of care as a director. This provision does not, however,
eliminate or limit the personal liability of a director (i) for any breach
of such director's duty of loyalty to the Company or its stockholders, (ii)
for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) under Nevada statutory
provisions making directors personally liable, under a negligence standard,
for unlawful dividends or unlawful stock repurchases or redemptions, or (iv)
for any transaction from which the director derived an improper personal
benefit. This provision offers persons who serve on the Board of Directors
of the Company protection against awards of monetary damages resulting from
breaches of their duty of care (except as indicated above), including
grossly negligent business decisions made in connection with takeover
proposals for the Company. As a result of this provision, the ability of
the Company or a stockholder thereof to successfully prosecute an action
against a director for a breach of his duty of care has been limited.
However, the provision does not affect the availability of equitable
remedies such as an injunction or rescission based upon a director's breach
of his duty of care. The SEC has taken the position that the provision will
have no effect on claims arising under the federal securities laws.
ORGANIZATION WITH THE LAST FIVE YEARS
China Peregrine Food Corporation is a Delaware corporation formed on April
26, 1996. Presently, the Company owns the controlling interest in a Sino-
American joint venture in China known as Green Food Peregrine Children's
Food Co. Ltd. ("Green Food Peregrine"). Green Food Peregrine is in the
business of processing and distributing dairy and non dairy food products in
the People's Republic of China and, at present, owns and operates a dairy
processing plant in Shanghai. Green Food Peregrine is an equity joint
venture with registered capital of US $5,000,000 and established under the
law of the People's Republic of China on July 3, 1993. The equity interest
of Green Food Peregrine presently is divided among the Company (70%) and its
Chinese partner, China National Green Food Corporation ("China National
Green Food") (30%). Consistent with the national scope of the Green Food
Peregrine joint venture, China National Green Food is wholly owned by the
Ministry of Agriculture of the People's Republic of China.
<PAGE> 27
The business focus of Green Food Peregrine is providing milk and non-
carbonated beverages in China through the development and utilization of
advanced food technology and western-style marketing expertise. Currently,
Green Food Peregrine is manufacturing and distributing dairy products in
Shanghai and is in the process of developing a number of new and non-
carbonated beverages for infants and school age children. Green Food
Peregrine intends to establish processing facilities and operate in cities
with a population of more than two million throughout China.
From April of 1993, through March 5, 1997, the majority equity interest in
Green Food Peregrine was owned by China Peregrine Enterprises, Limited
("China Peregrine Enterprises"), a Texas limited partnership created for the
sole purpose of controlling the operation of the Green Food Peregrine joint
venture business. The Green Food Peregrine joint venture company was formed
pursuant to a Joint Venture Contract and Articles of Association, dated
April 13, 1993, by and among China National Green Food, China Peregrine
Enterprises, and Amer-China Partners Ltd. ("Amer-China"). Pursuant to the
Joint Venture Contract and the Articles of Association for Green Food
Peregrine, China Peregrine Enterprises was required to invest US $3,000,000
as its share of the joint venture's registered capital, with an initial
investment of US $720,000. Subsequent to the initial investments by the
respective parties, the Articles of Association were amended to reflect an
additional capital contribution by China Peregrine Enterprises, so that it
ultimately obtained a 70% interest in Green Food Peregrine.
From its inception in 1993 through the end of 1996, Green Food Peregrine
sought to complete the construction of its processing plant for efficient
production and to develop a foothold in the Shanghai retail milk market.
The Shanghai operations were not profitable and China Peregrine Enterprises
was in need of additional financing to fund those operations and to meet its
capital contribution obligations under the Joint Venture Contract and the
Articles of Association. As a result, management of China Peregrine
Enterprises embarked on fund raising efforts outside of the limited
partnership participants, in an attempt to satisfy these financial needs.
The efforts to obtain outside financing continued through the close of 1996,
when China Peregrine Enterprises sought to provide for its final required
capital contribution installment of approximately US $1,200,000. At that
time, negotiations began with representatives of the Company, which was then
a non-operating corporate entity, to utilize the Company as an appropriate
vehicle to manage the asset represented by the Joint Venture Contract, and
to raise the required funds to go forward. Those negotiations resulted in
the March 5, 1997, purchase of the assets of China Peregrine Enterprises by
the Company in exchange for common stock of the Company. The assets
purchased by the Company consisted of China Peregrine Enterprises' equity
interest in Green Food Peregrine and its contractual rights under the Green
Food Peregrine Joint Venture Contract. After the acquisition of the China
Peregrine Enterprises assets by the Company, the partners of that limited
partnership held 45% of the Company's common stock.
The Company, which was formed on April 26, 1996, under the laws of the state
of Delaware, was formerly known as Shakespeare Holding, Inc.
("Shakespeare"). In February, 1997, Shakespeare merged with Manor Products
Corp., a Delaware company established on January 26, 1996, and changed its
name to China Peregrine Food Corporation. Manor was a shell company with 331
shareholders and no operating history. Similarly, China Peregrine Food
Corporation was a company without substantial assets or operating activity
until it purchased the assets of China Peregrine Enterprises in March, 1997.
Prior to the negotiations leading up to the acquisition of the assets of
China Peregrine Enterprises by the Company, the two entities had no
affiliation, other than a social acquaintance between Mr. Paul Downes, an
individual who controlled Shakespeare, as it was then known, and Mr. Dale
Reese, the major investor in the China Peregrine Enterprises limited
partnership. The negotiations for the purchase of the China
<PAGE> 28
Peregrine Enterprises assets were conducted by and among (1) Mr. Downes, (2)
Mr. Reese, (3) Mr. Charles Beech, who was responsible for negotiating and
obtaining the Joint Venture Contract in 1993 and who controlled the General
Partner of China Peregrine Enterprises, and (4) Mr. Roy Warren, a financial
consultant who had worked with China Peregrine Enterprises in its attempts
to raise additional capital for the Joint Venture project. These
negotiations were an extension of the then ongoing attempts of China
Peregrine Enterprises to raise additional capital. By agreement of these
parties, a plan to reorganize the business of the limited partnership was
developed, which included the utilization of an entity which (1) was more
suited to raising the needed additional capital, (2) preserved and protected
the financial and control positions of those who held the major interests in
the limited partnership, and (3) provided the requisite incentive for new
participants to become involved directly on a long term basis. To achieve
the first goal, the already existing Shakespeare entity was utilized and,
to achieve the second and third goals, the four parties responsible for the
"reorganization" plan were issued common and preferred stock at par value as
"founders" of the recast Company.
After the equity structure of the newly reorganized Shakespeare entity was
determined and effected, the parties set about the task of making the
Company (now called China Peregrine Food Corporation) the operating entity
and raising new monies to support the Company. Several significant steps
were taken to achieve those goals, including (1) the retirement of China
Peregrine Enterprise's bank debt in the amount of $1,260,0000, by Mr.
Reese's assumption of same, (2) the transfer of the limited partnership's
assets (the Joint Venture Contract) to the Company in exchange for stock,
and (3) Mr. Reese's payment of approximately US$1,200,000 to satisfy capital
contribution requirements of the Chinese Joint Venture, the repayment of
which by the Company was financed, in part, through a limited public
offering, commencing in March of 1997. In consideration of Mr. Reese's
assumption of the bank debt of China Peregrine Enterprises, he was issued
1,260,000 shares of the Company's Series A Preferred Stock, having an
agreed upon value of $1.00 per share. Similarly, the Company issued
1,040,000 shares of its common stock, at $1.00 per share, to China Peregrine
Enterprises in connection with the Company's asset purchase, and the Company
raised $975,000 to meet the Joint Venture Contract capital requirements,
through the issuance of 975,000 shares of its common stock in connection
with the March, 1997 limited public offering.
The March 5, 1997 purchase of the assets of China Peregrine Enterprises by
the Company resulted in the Company becoming an operating entity. In
consideration for this purchase, the Company issued 45% of its outstanding
common stock to the limited partnership. As a result, owing to the
Company's non-operating status prior to the above-described acquisition,
this transaction has been accounted for as a "reverse" acquisition for
financial reporting purposes. Although China Peregrine Enterprises is deemed
to be the acquiring company for financial accounting and reporting purposes,
the legal status of the Company as the surviving and operating corporation
remains intact.
With the Company's acquisition of 100% of the assets of China Peregrine
Enterprises, the Company was poised to become the controlling partner of
Green Food Peregrine. Since, however, Green Food Peregrine is a national
Chinese joint venture, the Company's replacement of China Peregrine
Enterprises as the controlling partner was subject to (1) the approval by
the Board of Directors of Green Food Peregrine and (2) the approval by the
Ministry of Foreign Trade and Economic Cooperation (MOFTEC), which is the
Chinese governmental authority that initially approved the Green Food
Peregrine joint venture in 1993. In typical fashion, that approval process
took the form of proposed amendments to the Green Food Peregrine Articles of
Association, calling for the replacement of China Peregrine Enterprises with
the Company. In addition, the Joint Venture Contract was modified to reflect
the change. During the interim period between the March 5, 1997 acquisition
transaction and final governmental approval, the Company operated Green Food
Peregrine pursuant to an agency agreement executed by China Peregrine
Enterprises
<PAGE> 29
and the Company. Final governmental approval for the amended Articles of
Association was obtained on July 31, 1998.
The Joint Venture Contract by and among China Peregrine Enterprises Limited,
China National Green Food Corporation and Amer-China Partners was executed
on April 13, 1993. Subsequent to the execution of the contract, as
discussed herein, the Company purchased the rights of China Peregrine
Enterprises Limited and Amer-China Partners to this contract. Pursuant to
its terms, the execution of the contract and of all material changes to the
Joint Venture Contract must be approved by the Ministry of Foreign Trade and
Economic Cooperation. In accordance with the Joint Venture Contract, a
limited liability company, known as Green Food Peregrine Children's Food
Company Limited, was formed in July of 1993. As a limited liability
company, the liability of each equity owner is limited to its respective
contributions of registered capital. As such, no party is liable to the
other for the liabilities of Green Food Peregrine.
The total registered capital for the Joint Venture Company is US $5,000,000,
with China Peregrine Enterprises initially contributing 60% of that amount.
The contribution of capital, which is now completed under the express terms
of the Joint Venture Contract, was paid into Green Food Peregrine in stages,
the last payment of which occurred in March of 1997, in the amount of US
$1,200,000.
The stated purpose of the Joint Venture Contract is to strengthen economic
cooperation and exchange of technology to develop and improve the quality of
products which are competitive in the domestic and international markets and
to improve economic efficiency and ensure satisfactory economic profits.
The scope of the business of Green Food Peregrine is stated as the
manufacture, distribution and marketing of children's fresh milk and other
children's food products, including baby foods and supplements. The
geographic scope of the joint venture was initially set in Shanghai and
Beijing, with expansion to other cities with a population exceeding 2
million upon approval by the Board of Directors.
No party to the Joint Venture Contract may assign or sell any or part of its
ownership interests without a written consent from all other parties to the
Joint Venture Contract. Similarly, any changes in the registered capital of
the Joint Venture Company must receive the unanimous approval of the Board
of Directors and be approved by the examination and approval authority. The
respective responsibilities of the parties under the Joint Venture Contract
include China National Green Food Corporation's assistance and compliance
with all local legal, governmental and other requirements for the operation
of the business. The other parties, including the Company, have the
responsibility for providing equipment and materials to operate the
business and to initiate and maintain qualified management, who have the
responsibility of operating the business of the Joint Venture Company.
The Board of directors of the Joint Venture Company shall consist of five
members, with China National Green Food Corporation having the right to
appoint two members, the Company having the right to appoint three members,
plus the appointment of one advisory director, who has no right to vote.
The term of board members is four years unless extended by the appointing
party. The Chairman of the Board is elected from the members appointed by
China National Green Food Corporation. While the Chairman is designated as
the Legal representative of the Joint Venture, the Chairman acts at all
times subject to the direction of the Board of Directors. The Joint Venture
Contract provides that the Board of Directors is the highest organ of power
of the joint venture...and the Board has the sole power to revise the
Articles of Association for the Joint Venture Company, increase or assign
the registered capital and make determinations concerning the termination,
dissolution or liquidation of the joint venture.
<PAGE> 30
The management of the business of the Joint Venture Company is the
responsibility of the General Manager, who is nominated by the Company and
approved by the Board of Directors. The General Manager is responsible for
implementing all resolutions of the Board of Directors and for organizing
and exercising management of the daily administrative and production
functions of the Joint Venture Company. The General Manager also is
responsible for the preparation of the annual business plan and budget,
which is submitted to the Board of Directors for review. The General
Manager's responsibility for the annual business plan and budget includes
the procurement of equipment and other property, raising and expenditure of
capital, plans for production and marketing, maintenance and repair of
property and equipment, budgetary estimates of the Joint Venture Company
based on production plans and budgets, the formulation of training plans for
joint venture personnel, the provision for raw material, fuel, water,
electricity and other public facilities needed by the Joint Venture Company.
In addition, the General Manager is responsible for the control of all
labor-management affairs, the procurement of materials and equipment to be
utilized by the Joint Venture Company in its business, and the preparation
of financial statements of account for the Joint Venture Company.
The term of the Joint Venture Contract is fifty years, and can be extended
by the Board of Directors upon the approval and examination of the approval
authority. The Joint Venture Contract, however, may be terminated by
written notice prior to the expiration of the stated term upon certain
events including a violation of the Joint Venture Contract by any party,
without resolution; accumulated losses in excess of the total registered
capital, without resolution; assignment of equity ownership by one party
without approval; and the violation of Chinese laws in the operation of the
joint venture. Upon a written notice of termination, the parties to the
Joint Venture Contract are charged with making attempts to negotiate a
resolution of the circumstances which led to the notice of termination
within sixty days after the issuance of the termination notice. If the
parties cannot reach an agreement to settle the matter, the Board of
Directors is directed to submit an application to the examination and
approval authority for dissolution.
The Joint Venture Contract provides for the continuation of the operation of
the Joint Venture Company subsequent to the expiration of the 50 year term,
either by unanimous agreement or upon the satisfaction of certain terms and
conditions by less than all of the parties to the Joint Venture Contract.
If the Joint Venture Company is not continued under any circumstances beyond
the term of the Joint Venture Contract, provisions are made for the orderly
liquidation of the assets of the company and any remaining capital after
payment of debts shall be divided according to the parties' respective
registered capital contributions.
If any party fails to fulfill its liabilities under the Joint Venture
Contract, the breaching party shall have thirty days to resolve such breach
after receiving written notice of the breach from the other party. If the
breaching party fails to correct the breach, that party shall compensate the
other parties for all the direct and foreseeable loss arising from the
breach of contract. Under no circumstances, however, shall the breaching
party's liability exceed its registered capital contribution.
If any dispute is not resolved in accordance with the terms of the contract
in the time periods provided, the dispute shall be submitted to the American
Institute of the Stockholm chamber of commerce in Stockholm, Sweden, for the
final decision in accordance with the arbitration rules of the Institute.
As part of the March 5, 1997 transaction between the Company and China
Peregrine Enterprises, the Company (through a loan from Mr. Reese)
contributed approximately US $1,200,000 to the registered capital of Green
Food Peregrine, satisfying the requirements of both the Green Food Peregrine
Joint Venture Contract and the Articles of Association, for the payment of
the final installment of the registered
<PAGE> 31
capital. The monies extended by Mr.Reese were paid back, in part, by a
limited public offering of the Company's common stock.
On October 1, 1997, the Company and Amer-China executed an agreement for the
transfer of Amer-China's contract rights and equity interest in Green Food
Peregrine to the Company. The consideration for this transfer was 120,000
shares of the Company's common stock. With the approval of this transfer by
the Ministry of Foreign Trade and Economic Cooperation, the Company's equity
interest in Green Food Peregrine increased from 67.6% to 70%.
On May 2, 1998, the Company approved and ratified an agreement between the
Company and China National Green Food for the increase of the Company's
equity interest in Green Food Peregrine from 70% to 76.92%. This change in
the ownership ratio will take place upon the payment of an additional US
$1,500,000 in registered capital by the Company over the next eighteen
months. Since Chinese government regulations require approval of this
change of the investment ratio by the Ministry of Foreign Trade and Economic
Cooperation, the Company has agreed to an interim loan of US $500,000 to
Green Food Peregrine, with the conversion of that loan to registered capital
upon obtaining the required governmental approval.
On September 3, 1997 and June 28, 1998, respectively, the Company executed
agreements to acquire a 52% interest in Hangzhou Meilijian Dairy Products
Co., Ltd., ("Hangzhou Meilijian") from American Flavors China, Inc.
("American Flavors China"), a Delaware corporation. American Flavors China
is controlled by Noam and Florence Sender. Prior to this transaction, the
Senders had no affiliation with the Company. The remaining 48% of Hangzhou
Meilijian is owned by Hangzhou Dairy Co., a controlled entity of the
regional Chinese government. On July 31, 1998, the Board of Directors of
Hangzhou Meilijian approved the acquisition. The acquisition transaction is
subject to formal approval by the regional government agency. That
governmental approval process presently is pending. In the interim period,
the operational control of Hangzhou Meilijian has been transferred to the
Company pursuant to a principal/agent agreement with American Flavors China,
effective July 31, 1998. The Company, with the cooperation of its Chinese
partner and American Flavors China, has installed a new management team to
run the day to day operation of that dairy facility.
The Joint Venture Contract by and among Hangzhou Dairy Complex and American
Flavors China, Inc. was executed on July 25, 1993. Pursuant to its terms,
the execution of the contract and of all material changes to the Joint
Venture Contract must be approved by the examination and approval authority.
As a limited liability company, the liability of each equity owner is
limited to its respective contributions of registered capital. As such, no
party is liable to the other for the liabilities of the Joint Venture
entity.
The total registered capital for the Joint Venture Company is US $5,000,000,
with American Flavors China initially contributing 52% of that amount. The
contribution of capital, which is now completed under the express terms of
the Joint Venture Contract, was paid into the Joint Venture entity in cash
and equipment.
The stated purpose of the Joint Venture Contract is to strengthen economic
cooperation and exchange of technology to develop and improve the quality of
products which are competitive in the domestic and international markets and
to improve economic efficiency and ensure satisfactory economic profits.
The scope of the business of the Joint Venture is stated as the manufacture,
distribution and marketing of children's fresh milk and other children's
food products, including baby foods and supplements
No party to the Joint Venture Contract may assign or sell any or part of its
ownership interests without a written consent from all other parties to the
Joint Venture Contract. Similarly, any changes in the
<PAGE> 32
registered capital of the Joint Venture Company must receive the unanimous
approval of the Board of Directors and be approved by the examination and
approval authority.
The Board of directors of the Joint Venture Company consists of six
members, with three members being appointed by each party. The term of
board members is four years unless extended by the appointing party. The
Chairman of the Board is elected from the members appointed by American
Flavors China and is designated as the legal representative of the Joint
Venture. The Board has the sole power to revise the Articles of Association
for the Joint Venture Company, increase or assign the registered capital and
make determinations concerning the merger, termination, dissolution or
liquidation of the joint venture. The management of the business of the
Joint Venture Company is the responsibility of the Board of Directors, with
limited powers delegated to the General Manager
The term of the Joint Venture Contract is twenty years, and can be extended
by the Board of Directors upon the approval and examination of the approval
authority. The Joint Venture Contract, however, may be terminated prior to
the expiration of the stated term upon certain events including a violation
of the Joint Venture Contract by any party, without resolution; accumulated
losses resulting in the inability of the Joint Venture to continue; and
conditions of impossibility of performance.
The Joint Venture Contract provides for the continuation of the operation of
the Joint Venture Company subsequent to the expiration of the twenty year
term, by unanimous agreement of the parties. If the Joint Venture Company is
not continued beyond the term of the Joint Venture Contract, provisions are
made for the orderly liquidation of the assets of the company and any
remaining capital after payment of debts shall be divided according to the
parties' respective registered capital contributions.
If any dispute is not resolved in accordance with the terms of the contract,
the dispute shall be submitted to the American Institute of the Stockholm
chamber of commerce in Stockholm, Sweden, for the final decision in
accordance with the arbitration rules of the Institute.
THE BUSINESS OF THE COMPANY
GENERAL
- -------
The Company is headquartered in West Palm Beach, Florida. The Company
directs the operations of its subsidiary, Green Food Peregrine, from that
location and through frequent trips to China by either the Company's
President or Chairman. In addition, we have selected key personnel to run
the day to day operation of the Green Food Peregrine dairy processing plant
located in Shanghai, the People's Republic of China. As such, we utilize
monthly reports from our on site management, together with visits by
stateside personnel to monitor and manage the Green Food Peregrine
operations.
The mission of the Company is to implement a comprehensive manufacturing,
distribution and marketing strategy that allows the Company to operate its
joint operations in Shanghai profitably and, subsequently, to expand the
joint venture business into new markets with dairy and non-dairy food
products. This strategy involves the creation of a nationwide network of
state-of-the-art manufacturing facilities that can process products and
deliver the highest quality fresh refrigerated pasteurized milk to the local
consumer. Such facilities will allow the Company to develop its position as
an effective competitor in the dairy business in major cities in China and
allow for the expansion of the Company's business into other dairy and non-
dairy food products. As such, the present business of the Company is two-
fold: first, the
<PAGE> 33
manufacturing, marketing and distribution of dairy and, ultimately, a
combination of dairy and non-dairy products to consumers; and second, the
expansion of these operations to major cities throughout the People's
Republic of China, either through acquisitions of existing dairy processing
facilities or the construction of new facilities.
With respect to the expansion of products to include non-dairy items, such
as fruit juices, new juice products currently are being formulated and
tested in laboratory and consumer preference conditions to develop products
which best appeal to local consumers. We expect that this testing and
formulation process will present sufficient data for a decision on the
release of new non-dairy products in the Shanghai market during the last
quarter of 1999. In Hangzhou, our joint venture currently produces and
sells a variety of juice products, which account for approximately 10% of
Hangzhou Meilijian's annual gross sales. While we are attempting to
increase overall sales in the Hangzhou market, no special efforts are
anticipated to increase non-dairy sales as a percentage of gross sales.
With respect to the Company's current acquisition activities, we anticipate
that negotiations, due diligence and appraisal processes pertaining to
existing dairies under consideration for possible acquisition will be
completed by the third quarter of 1999, at which time a decision will be
made. Funding of any such acquisitions will be provided through the sale of
the Company's equity. At present, we do not anticipate the expansion of
operations through the construction of new dairy facilities.
The Shanghai manufacturing plant has been in full operation since December
of 1994, and consists of a 15,000+ sq. ft. facility having a daily capacity
of 45 tons. The process involves the receipt of tested and accepted milk
from a farm tanker, which is transferred to a blanching process stage. In
the blanching process, the milk is heated and cooled to a very cold
temperature to stabilize quality. Also, a lactose enzyme is introduced at
this stage, which converts lactose to glucose and galatose during subsequent
cold storage. The raw, stabilized and lactose reduced milk is then
transferred to a blender, where pre-prepared and pre-weighed additives are
incorporated. The milk is placed in blend tanks, which perform an averaging
and accumulation function for the pasteurization and homogenizing system,
following which the product is transferred to cold finished product tanks.
As a final pre distribution step, the product is filled into gable top
cartons of an appropriate size, and packed into corrugated boxes.
PRINCIPAL PRODUCTS, MARKETS AND DISTRIBUTION METHODS
- ----------------------------------------------------
The Products
- ------------
Historically and at present, the predominant milk product available to
consumers in major cities in the People's Republic of China has been non-
refrigerated "baggie milk," prepared for retail consumption on a daily
basis. Once opened, baggie milk must be consumed immediately, since the
shelf life of this product is non-existent. The processing of baggie milk
customarily has involved either a type of pasteurization that has not met
western bacteria count standards, or the utilization of an ultra high
temperature (UHT) process. As a result of the excessive temperatures to
which the milk is subjected, however, the UHT process can adversely affect
the nutrient value and the taste of the end product. The distribution of
milk in China has been through a methodology known as the "reserve system"
which was put in place more than a decade ago as a way to deliver state-
produced milk directly to milk stations and public housing units. Since
refrigeration is not part of this distribution system, the trend in recent
years has been to utilize UHT processed milk products in an attempt to meet
bacteria count standards.
Fresh, pasteurized and refrigerated milk of western quality and other fresh
dairy beverages generally have not been available at the retail level to any
significant degree. In recent years, several state owned facilities
<PAGE> 34
in major cities, along with a few regional joint ventures between the
Chinese government and private groups, have developed more advanced methods
of processing, packaging, and delivering fresh, refrigerated milk products.
To date, however, these fresh refrigerated milk products represent less than
a fifteen percent market share in the major markets throughout the People's
Republic of China.
The Company's subsidiary, Green Food Peregrine, has constructed an initial
manufacturing facility in Shanghai that processes, packages and distributes
western quality fresh, pasteurized, refrigerated milk. Green Food Peregrine
has produced and distributed branded products of this type since the second
quarter of 1995. Initially, the Shanghai plant was set up as a test market
to develop the Company's operational plans, ranging from production,
operations, marketing and sales, prior to local expansion. Included in this
initial and continuing operation is our attempt to implement a strong
consumer acceptance for our Happy FamilyTM brand of dairy products. In
Shanghai, Green Food Peregrine is the only company that sells western
quality pasteurized, fresh, refrigerated milk in gable topped cartons.
"Gable topped" cartons are traditional Western style treated paper box like
containers with triangular "gable" tops. Five years ago, 100% of the milk
purchased by Shanghai consumers was the traditional non-refrigerated baggie
milk. In 1998, chain food stores in Shanghai significantly increased the
availability of refrigeration at retail. The Happy FamilyJ brand is the only
gable top milk sold in Shanghai, which is fresh, pasteurized and
refrigerated.
Suppliers
- ---------
Both the Shanghai and Hangzhou operations utilize cartons and boxes supplied
by International Paper Company. In Shanghai, Green Food Peregrine purchases
raw milk from a number of suppliers, with 60% of such purchases from East
Sea Dairy Company and Hangzian Dairy, on an equal basis (30% each). The
remaining 40% of purchases are spread among a group of suppliers, with no
significant percentage attributable to any one dairy. In Hangzhou, the
Hangzhou Meilijian joint venture buys 80% of its raw milk from the Company's
partner in that joint venture, Hangzhou Dairy Complex. The remaining 20% of
purchases are from a variety of other dairies. Neither facility has
experienced problems with suppliers and we anticipate that the required raw
goods supply will be stable and adequate in the future.
Price Strategy
- --------------
Green Food Peregrine refrigerated milk is sold in Shanghai at a premium
compared to the price per ounce of the milk that is distributed in 240 ml
plastic baggie packages. Typically, baggie milk is sold at .8 renminbi
(RMB), or approximately US$0.09 (at the government set exchange rate of
8.3), as compared to 3 RMB, or approximately US$0.36, for the 240 ml Green
Food Peregrine milk. While more expensive, Green Food Peregrine
market research conducted in 1994, suggests that consumers would prefer the
Happy FamilyJ product to the "baggie milk" product and package. Green Food
Peregrine in-market experience through 1998 confirms this and supports our
strategy rationale that Chinese consumers are willing to pay a premium for
quality and value. Demographic statistics also confirm that urban consumers
have the financial capability to pay a premium price for premium value at
the consumer products level. Therefore, depending on the competitive
individual products, and the quality of those competitive individual
products, Green Food Peregrine expects to continue to price its gable top
milk higher than the per ounce price of baggie milk.
The 1994 market research referenced above and elsewhere in this discussion
was designed by Message Factors, Inc., a US marketing company controlled by
Mr. Charles Beech, with experience in marketing in the People's Republic of
China. The actual market research was performed by Modern International
<PAGE> 35
Market Research, Inc., a recognized independent Chinese marketing research
company based in Shanghai.
The referenced demographic statistics in this discussion are based upon
extrapolations from the Chinese State Statistical Bureau Reports for 1997
and China The Consumer Revolution, Conhua Li, Deloitte & Touche Consulting
Group, John Wiley & Sons, Publishers, 1998.
Distribution
- ------------
Currently, Green Food Peregrine product distribution is being held at a
limited store distribution level pending additional working capital
contributions by the Company. Presently, numerous state owned dairies and
beverage companies distribute throughout Shanghai. The direct competition
for milk in cartons, however, emanates from two state owned enterprises and
one Korean joint venture. Sales of carton milk represent approximately 40%
of the total milk sales in the Shanghai metropolitan area. Since
the commencement of the Shanghai plant operation, Green Food Peregrine has
sought to place its products in chain stores in an effort to maximize its
distribution efforts. In 1998, approximately 650 chain stores exist in
Shanghai, with Green Food Peregrine distributing its product to
approximately 70% of these stores. The remaining 30% of the chain stores
are in locations in the large Shanghai metropolitan area that are not
efficient for our present distribution efforts. We believe that, as time
moves forward, the vast majority of milk products will be sold through these
stores and new channels of distribution will need to be developed for the
smaller retail shops.
Distribution by Green Food Peregrine in Shanghai starts with the delivery of
product from the processing plant to a distribution center in a large
refrigerated truck operated by the joint venture. Green Food Peregrine van
type refrigerated trucks then pick up product at the distribution center
once each day for delivery throughout the Shanghai metropolitan area, with
typically 20 to 30 delivery stops per day. Presently, drivers are not
responsible for the collection of payment for product, which is accomplished
through a direct invoice system.
In Hangzhou, 90% of product distribution is accomplished utilizing the
traditional Chinese "reserve system" discussed below. Each delivery truck
is insulated and makes deliveries directly from the processing plant.
Typically, each delivery truck makes one plant pick up and follows the same
delivery route each day.
Distribution Opportunities
- --------------------------
Until the very recent past (in the last three years) most fresh dairy
products in China were delivered from a non-refrigerated vehicle to a non-
refrigerated point of purchase. Typically, this point of purchase was in
the housing units (similar to large apartment buildings) of consumers. As a
result, product was delivered within hours of production (in the very early
morning hours), purchased by the consumer immediately upon delivery to their
housing unit, and consumed within hours of purchase. Under this "reserve
system," milk is packaged in 240 ml soft baggie packets that are purchased
daily in the lobby of the respective housing units. This milk historically
has a high bacteria count and less than satisfactory taste by western
standards.
In Shanghai, as well as in most of the rest of China, delivery of fresh,
refrigerated products and merchandising of fresh, refrigerated products at
retail virtually had been non-existent. During the last two years,
however, the appearance of retail super stores and grocery chain stores has
opened the door for more "westernized" marketing of refrigerated products
such as milk. Today, Green Food Peregrine products are sold in 450 super
stores and chain stores. These 450 stores are the largest of this type in
Shanghai and represent approximately 85% of the milk business in area chain
stores. Given that the number
<PAGE> 36
of these supermarkets in Shanghai grew in 1997 by 40%, we expect Green Food
Peregrine to be represented in over 800 such stores by the year 2000, as the
number of these stores grows.
The incremental product acceptance of premium fresh, refrigerated milk in
Shanghai is such that our distribution system must expand. We can produce
many times the volume of milk than we can distribute currently and we intend
to increase distribution to take advantage of our production capabilities.
Accordingly, the strategy developed for Shanghai for 1999 calls for
employment of additional refrigerated trucks to facilitate our expected
expansion of distribution to the many retail outlets in Shanghai.
Sales Expansion / Working Capital
- ---------------------------------
In 1999, Green Food Peregrine intends aggressively to expand its sales and
distribution in Shanghai. We fully intend to increase our presence in all
super stores and supermarkets while continuing to serve a small percentage
of the local retail trade. The new consumer buying patterns in Shanghai have
attracted many new food retailers in this market as consumer expenditures
for food have increased by 60% in the past 5 years.
Servicing these stores and the introduction of new products such as juices
could expand our sales approximately three-fold in 1999, and will require
capital expenditures, including investment in equipment and working capital
to finance receivables. The 1999 plan calls for the investment of
approximately US $2,000,000 and, if successfully implemented, could bring
the Green Food Peregrine business to a break even point during the next
twelve months. In addition, Green Food Peregrine intends to develop, market,
and distribute new products in Shanghai and other cities. In the next
twelve months, we will focus on the expansion of Green Food Peregrine's
market share within the current market and with existing and new products in
Shanghai.
Marketing and Advertising
- -------------------------
In China, the viewing rate for television is over 80% for those who have
watched television as recently as the previous day. This figure rises to
86% for urban population. Nationwide, 54% of households own black and white
televisions and another 40% have color televisions. In Beijing and Shanghai,
94% of households own color televisions.
At this time, there virtually is no advertising for milk or ready-to-feed
infant formula in Shanghai. There is TV and print advertising for other
carbonated and non-carbonated beverages, and multi-national company branded,
aseptic and powdered products. We believe that all beverage advertising for
branded quality products will increase overall awareness and consumption for
these categories. After Green Food Peregrine has expanded its distribution,
we intend to begin print and television advertising.
Warner Bros. Licensing
- ----------------------
In January 1999, the Company signed a Master Licensing Agreement with Warner
Brothers Consumer Products Co. and obtained the right to utilize Warner
Brothers' "Looney Tunes"TM character images and names in the Shanghai and
Hangzhou greater metropolitan areas. This licensing agreement gives the
Company exclusive rights with respect to such images and names in the
defined geographic regions for use in connection with specified categories
of products sold by the Company's subsidiaries in those areas. The Company
will introduce these "Looney Tunes"TM products in the Shanghai and Hangzhou
markets in the summer of 1999.
<PAGE> 37
Competition
- -----------
In Shanghai, Green Food Peregrine is subject to significant competition from
various dairy product producing sources that offer both traditional baggie
milk and gable top milk at reduced prices. In the first two months of 1998,
QJ Dairy, a privately (non-government) owned Korean enterprise, entered the
market as a new competitor and significantly lowered its prices in order to
achieve a greater market share. While the price reduction by the competitor
was dealt with effectively by the Company to protect its market share, there
can be no assurance that similar events will not take place in the future,
requiring more drastic measures by Green Food Peregrine. Accordingly, as
part of the Company's marketing strategy, we intend to emphasize consumer
awareness of the differences in quality and taste between Green Food
Peregrine's products and those of competitors. We believe that this type of
consumer awareness can mitigate the negative effects of reduced prices by
competitors.
Currently, there is competition for gable top milk in Shanghai. This
competition is represented by Shanghai Dairy Corporation, a subsidiary of a
Hong Kong conglomerate, which enjoys approximately 80% of the overall retail
milk market in the metropolitan area., two state dairies and the Korean
joint venture. The only pasteurized and fresh product, however, is produced
by the Company. As a result, Green Food Peregrine intends to continue its
focus on the quality of raw milk purchased, our processing, and the
efficiency of packaging and distribution to promote its brand image.
For quite some time, there have been powdered and aseptic packaged products
available in China that could be considered as indirect competition to the
Happy FamilyJ product line. Green Food Peregrine market research, which
commenced in 1994 (discussed above) and continues through the present,
however, as well as Green Food Peregrine in-market consumer experience,
demonstrate a consumer preference for the Happy FamilyTM brand. Green Food
Peregrine strategy is to continue to build the Happy FamilyTM brand and logo
to create a real competitive point of difference through highest quality
products, packaging and effective marketing.
Heinz and Gerber have been importing their non-refrigerated baby food
products to China. Also, Nestle and other companies have been importing
powdered baby formula and powdered milk. There is a segment of the market
that will purchase these products, but market research and the in-market
experience of Green Food Peregrine, in combination with its refrigerated
distribution system, demonstrates that there is today an existing and
growing market for fresh refrigerated Happy FamilyTM products.
ACQUISITION ACTIVITIES AND STRATEGY ACQUISITION ACTIVITIES AND STRATEGY
- -----------------------------------------------------------------------
General
- -------
We intend to continue to focus the Company's efforts on producing quality
products through technological innovation. In addition, we intend to
explore the opportunities presented by our joint venture business which are
the result of a shortage of technological facilities with respect to the
processing of dairy and other products, the emerging Chinese consumer
market, and the shift from a controlled economy to a free market system in
this industry. The government of the People's Republic of China has
prioritized the development of children's food, in particular milk products,
to better serve its people. The role of agriculture, in general, in China is
of paramount importance and is the largest segment of China's economy in
terms of capital demands, consumer expenditure and employment. In addition,
owing to the relatively low level of productivity in agricultural sectors
and the challenge of feeding 1.2 billion people, the government of China
continues to place a high priority on improving this segment of its economy
with new
<PAGE> 38
technologies and methodologies. As a result, the Ministry of Agriculture,
which wholly owns our partner in Green Food Peregrine, plays an important
role in economic and political decisions that effect the food industry in
China.
Recently, the Chinese government changed its laws with respect to the future
ownership of companies presently owned by state enterprises. These laws now
allow for the acquisition of state owned facilities by private investors,
including foreign-Chinese joint venture combinations. We intend to pursue
an acquisition strategy which involves the creation of new joint ventures
with our existing partner to acquire state owned dairies, to retool the
production facilities of those dairies, and to offer high quality products
to the Chinese consumer.
Hangzhou Meilijian Dairy Co.
- ----------------------------
The Hangzhou based joint venture has been in business for over 40 years and
has over 420 employees. Sales for this joint venture in 1997 were
approximately US $6,240,000. Hangzhou Meilijian has 60% of the total market
share in the Hangzhou urban area, which has a population of 5.8 million.
Hangzhou Meilijian produces and distributes dairy and juice products,
including baggie milk, milk powder, aseptic packaged milk and juice
products, as well as bottled drinkable yogurt. Hangzhou is located
approximately 180 miles from Shanghai. The Company plans to utilize this
acquisition and its proximity to the Shanghai operation to cross-market
products in both cities.
With this recent approval of the American Flavors China acquisition
transaction by the Board of Directors of Hangzhou Meilijian, we intend to
complete the formulation of a comprehensive market analysis to determine
whether the 85% market share presently enjoyed by Hangzhou Meilijian can be
improved.
Potential Acquisition Activities
- --------------------------------
In August of 1998, management of the Company met with representatives of our
partner in Green Food Peregrine to explore, among other things, the
potential acquisition of state owned dairies as part of the national
government's announced privatization program, either through the existing
joint venture or through the establishment of individual, separate joint
ventures for each potential acquisition site. A strategy was developed with
our partner to pursue this acquisition program.
As part of this strategy, the Chairman and President of the Company,
together with representatives of our partner in China, met with
representatives of four state-owned dairies and visited each dairy facility.
The Company has executed "letters of intent" with each of these dairies and
with our partner to continue the acquisition/negotiation process.
In China, the acquisition of state-owned enterprises by foreign entities
usually involves the creation of a joint venture company by articles of
association contemporaneous with the execution of a joint venture agreement.
That agreement then governs the respective registered capital requirements
of the parties and the ongoing rights and obligations of such parties in and
to the joint venture business. The actual "price" of the acquisition of hard
assets is a non-negotiated figure, set prior to the execution of these
documents by an appraisal report generated by government qualified and
approved third-party business appraisers. Presently, we are examining a
proposed joint venture contract for potential use in this process and we are
arranging for appraisals of each dairy involved. While these activities are
ongoing, "letters of intent" in China have no legal effect and we cannot
assume that acquisitions are probable.
<PAGE> 39
DOING BUSINESS IN CHINA
Investments in China involve several risks including internal and
international political risks, evolving national economic policies as well
as financial and accounting standards, expropriation and the potential for a
reversal in economic conditions.
Green Food Peregrine's revenues will be in Chinese renminbi ("RMB"). In
order to pay the Company fees and dividends, Green Food Peregrine will need
to convert RMB into US dollars. Under current Chinese law, the conversion
of RMB into foreign currency requires government consent. To date, Green
Food Peregrine has been able to convert currency without problem.
Government authorities, however, may impose restrictions, which could impact
this flexibility.
To complete the planned expansion into additional facilities, we will need
various levels of central and local government approval. These approvals may
include site permits, building permits, and approval for transfer of assets.
While we believe that, because of the importance attached to nutrition
issues for children by the central government, the encouragement for the
Company to expand either through the Green Food Peregrine joint venture or
separate new joint ventures will continue, there can be no assurance of
continuation of the government support which Green Food Peregrine has
enjoyed since its inception.
With respect to the conditions and activities of Chinese companies with
which the Company is involved pursuant to its joint venture contracts, the
operations of these joint venture companies must be viewed in the context of
the Chinese business environment existing in the People's Republic of China.
There can be no assurance that the sources from which information is
provided concerning the day to day activities of such joint ventures,
including their respective relationships to local governmental and
regulatory authorities, are wholly reliable. Official statistics also may
be produced on a basis different to that used in western countries. Any of
the statements as to operations contained in this document must be subject
to some degree of uncertainty due to doubts about the reliability of
available information from and with regard to the respective joint ventures.
Moreover, while the government of the People's Republic of China has pursued
a policy which has prioritized the development of children's food, in
particular milk products, to better serve its people resulting in a focus on
the role of agriculture, in general, in China, there can be no assurance
that this policy will continue in the long term. Similarly, the recent
changes in the laws of China pertaining to the future ownership of
commercial facilities presently owned by the state, which has resulted in a
perceived policy shift from a controlled economy to a free market system in
the dairy industry, may not be accurate in concept or in execution. As
such, the risk is present that the acquisition strategy set forth in this
document may not be successful owing to a change in government approach, or
that the very existence of the joint venture businesses in which the Company
has controlling interests may be affected adversely.
EMPLOYEES
As of February 28, 1999, the Company had four full time employees located at
its North Palm Beach corporate offices. For the same time period, Green
Food Peregrine had 75 employees servicing its Shanghai facility,
functionally categorized as follows: management, 4; administrative, 10;
manufacturing 41; and distribution, 20.
<PAGE> 40
MANAGEMENT DISCUSSION
AND ANALYSIS OF OPERATIONS
GENERAL
The following discussion and analysis of the Company's financial condition
and operations should be read in conjunction with the information which
follow, as well as the Report On Audited Consolidated Financial Statements
For The Years Ended December 31, 1996 and 1997, and December 31, 1998.
Since, for reporting purposes, a "reverse" acquisition occurred in March of
1997, between the Company and China Peregrine Enterprise, whereby the
Company became an operating entity, the discussion and analysis of the
periods prior to March of 1997 pertains to the financial condition and
operation of China Peregrine Enterprises. The following discussion contains
trend information and other forward looking statements that involve a number
of risks and uncertainties. The Company's actual future results could
differ materially from its historical results of operations and those
discussed in the forward looking statements.
Overview
- --------
The Company and its subsidiary, Green Food Peregrine, engage in the business
of the processing, marketing and distribution of dairy products in the
People's Republic of China. Presently, the Company's primary business
activities are in the Shanghai market. The business of the Company also
involves the acquisition or construction of other dairy processing plants in
cities located in the People's Republic of China having a population of at
least two million. While the Company has purchased a controlling equity
interest in an existing joint venture located in Hangzhou, which produces,
markets and distributes dairy products, the approval of the Board of
Directors of that joint venture just recently occurred on July 31, 1998. In
conjunction with its Chinese partner in that joint venture and the former
majority equity holder, the Company has installed a new management team in
the Hangzhou facility. Accordingly, except with respect to the potential
future operations in Hangzhou, the following historical discussion and
analysis does not include the Hangzhou Meilijian operation.
In addition, in conjunction with its Chinese partner in the Green Food
Peregrine joint venture, the Company is exploring and negotiating the
potential acquisition of four additional dairy processing facilities, which
presently are state owned. Owing to the fact that insufficient information
is available on a current basis with respect to the historical operation of
these state owned dairies, the potential impact of such acquisitions is not
included in the following discussion, except as may be set forth in the
"trends" section below.
Trends
- ------
In addition to the matters discussed above, the following are important
factors that could cause actual results or events to differ materially from
those contained in any forward looking statement made by the Company.
Operating Strategy
- ------------------
The Company's ability to increase revenues of its existing operation and
other facilities which may be acquired will be affected by various factors,
including customer demand, and our ability to market our products
effectively. The Company's marketing plan requires a continued emphasis on
the qualitative differences of our products and competitive products, and
the development of other marketing programs
<PAGE> 41
necessary to attract new customers in existing markets. There can be no
assurance that our operating strategies will be successful or that the
Company will be able to generate cash flow adequate to support its
operations and internal growth.
In addition, management of the Company's China operation has embarked on
several cost cutting and efficiency directed programs in an effort to reduce
the costs of sales and general and administrative expenses. While the
Company believes those cost efficient methods of production and
distribution, such as more stringent operating controls, can be implemented,
there is no guaranty that these measures will result in profitability.
Availability of Acquisition Financing
- -------------------------------------
The ability of the Company to acquire additional dairy processing facilities
at affordable prices, to integrate new operations into our overall strategy,
and to grow such operations in a profitable fashion will depend upon the
availability of additional capital. The consideration for potential
acquisitions will be cash, which the Company will be required to raise
through the sale of its equity interests. If we are not successful in
raising additional capital, the Company may be limited in its ability to
continue its acquisition strategy.
YEARS ENDED DECEMBER 31, 1997 AND 1998
FINANCIAL CONDITION
General
- -------
At December 31, 1998, the Company had an accumulated deficit of US
$7,031,046. As of December 31, 1998, the Company had cash on hand of US
$748,590 and reported total shareholders' equity of US $2,014,991.
RESULTS OF OPERATIONS
On July 31, 1998, the Company purchased certain assets of American Flavors
China, Inc., consisting of that company's equity interest in and to a Sino-
American joint venture in Hangzhou, People's Republic of China, known as
Hangzhou Meilijian Dairy Products Co., Ltd. (Hangzhou Meilijian). For
financial reporting purposes, Hangzhou Meilijian is considered the
subsidiary of the Company as of that date, and the operations of Hangzhou
Meilijian for the last five months of 1998 have been integrated in the
financial reporting of the Company for the fiscal year 1998 consolidated
financial statements of the Company. As of July 31, 1998, Hangzhou
Meilijian had total assets of $6,512,950, with total current assets of
$1,928,336. Total liabilities amounted to $3,544,961, with total current
liabilities of $2,870,890. In addition, the joint venture company had total
equity of $2,967,989, with total revenues of $2,831,255.
Year Ended December 31, 1998
- ----------------------------
For the fiscal year ending December 31, 1998, the Company had net sales of
$2,870,714 and had a gross profit of $11,020. In addition to the $2,859,694
cost of goods sold, the Company had selling expenses of $523,465, and
general and administrative expenses of $2,106,641. After interest expenses
of $299,735 and other net expenses of $97,327, the Company had a net loss
before income tax of $3,016,148. Since the Company does not own 100% of the
equity interest in its subsidiaries, its share of the loss before income
taxes amounted to $2,461,829 resulting in a basic loss per share of $0.40.
<PAGE> 42
As noted above, general and administrative expenses have been and are
projected to be a significant percentage of revenue at this stage of the
Company's existence. We anticipate that as revenue increases through
marketing efforts in Shanghai, and with the acquisition of the Hangzhou
Meilijian joint venture, and through other potential acquisitions, general
and administrative expenses will increase in total but decrease as a
percentage of revenue.
The loss from operations for 1998 continued to result from the high level of
expense associated with the continuing attempts to penetrate an emerging
market with a product whose qualitative virtues were largely unknown to the
ultimate consumer.
In addition, the Company experienced significant general and administrative
expenses in connection with the approval of the acquisition of Hangzhou
Meilijian. The Company also spent certain resources to negotiate the
acquisition of certain of the assets of American Flavors China, Inc. (its
majority interest in the Hangzhou Meilijian joint venture), and two fund
raising exercises in 1998
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
- ---------------------------------------------------------------------
Revenues increased almost 300% to $2,870,714 in 1998 from $730,195 in 1997.
The increase was due to the continuing marketing efforts to penetrate the
sophisticated Shanghai market and the increase in sales volume of 1 Liter
milk, and the inclusion of the sales of Hangzhou Meilijian for the last five
months of 1998 in the financial statements of he Company
Cost of goods sold increased approximately 235% to $2,859,694 in 1998 from
$852,277 in 1997. In addition to the Hangzhou Meilijian operations, the
increase was due mainly to a higher level of revenue that required a
corresponding increase in cost of goods sold. However, cost of goods sold
accounting for a percentage of revenue decreased to 99% in 1998 from 117% in
1997. Consequently, the gross profit ratio was increased to .3% in 1998
from negative 17% in 1997. The reason for the mininal profit was that the
production volume was still under the necessary volume that would bring the
Company's Shanghai operation to a break-even level.
Selling expenses increased approximately 37% to $523,465 in 1998 from
$380,836 in 1997. The increase was due mainly to the continuing efforts to
penetrate Shanghai market and the inclusion if the Hangzhou Meilijian
operation. As a percentage of revenues, selling expense decreased to 18% in
1998 from 52% in 1997. This decrease was the result of a profitable
operation in Hangzhou, and greater efficiencies in the Shanghai operation.
General and administrative expenses increased approximately 12% to
$2,106,641 in 1998 from $1,873,360 in 1997. This increase reflects two 1998
fund raising exercises, the acquisition of some of the assets of American
Flavors China, Inc. (its majority equity interest in the Hangzhou Meilijian
joint venture), and the preparation and filing of a Form 10-SB by the
Company.. As a percentage of the total revenue, the general and
administrative expenses decreased to 73% in 1998 from 256% in 1997.
Interest expense increased approximately 27% to $299,735 in 1998 from
$234,517 in 1997. The increase in interest expense largely was a result of
the debt associated with the Hangzhou Meilijian operation.
Consequently, the net loss of the Company increased approximately 19% to
$2,577,446 in 1998 from $2,098,588 in 1997. The net loss applicable to the
Company as a percentage of revenue decreased to 89% in 1998 from 285% in
1997.
<PAGE> 43
Based on the results of operations, the Company reported a loss per share of
$0.59 in 1997 and $0.40 in 1998. The decrease in the loss per share was due
to the new issuance of common shares and the effect of the Hangzhou
Meilijian operations.. As of December 31, 1997, there were 5,289,000 shares
of common stock outstanding while as of December 31, 1998 there were
7,717,957 shares of common stock outstanding. Due to the timing of issuance
of new shares, however, the weighted average number of shares of common
stock outstanding in 1998 was 36,430,337. The loss per share in 1998
decreased by approximately 47% compared with 1997.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1997, the Company reported that net cash used in
operating activities was $1,929,803, net cash used in investing activities
was $128,727, and net cash provided by financial activities was $2,430,506
with the effect of changes in exchange rates at $5,468.
As of December 31, 1998, the Company reported that net cash used in
operating activities was $1,205,398, net cash used in investing activities
was $322,337, and net cash provided by financing activities was $1,787,287
with the effect of changes in exchange rates at $53,409.
Net cash used in operating activities decreased approximately 58% to
$1,205,399 in 1998 from $1,929,803 of net cash used by operating activities
in 1997. The decrease in negative cash flow in operating activities
reflects the profitable Hangzhou Meilijian operations and efficiencies
implemented in the Shanghai operation.
Net cash used in investing activities increased approximately 51% to
$322,337 in 1998 from $128,265 in 1997. The increase mainly was due to the
acquisition of a majority interest in Hangzhou Meilijian
Net cash provided by financing activities decreased 41% to $1,787,287 in
1998 from $2,430,506 in 1997. While fund raising continued in 1998, such
activities were less intense than in 1997, which were necessitated by the
restructuring of the Company in early 1997. In addition, the Company was
not required to raise additional capital to fund the Hangzhou Meilijian
operations, which was profitable at December 31, 1998.
The Company's primary requirements for cash (other than for acquisition
activities) consist of (1) purchasing transportation equipment for
distribution of its products; (2) expenses related to product development,
marketing and advertising in Shanghai and, to a lesser extent, in Hangzhou;
and (3) repayment of loans to state-owned Chinese banks in the aggregate
amount of approximately US $8,572,868. The Company estimates that net cash
provided by current operating activities together with cash on hand will
enable the Company to meet the anticipated cash requirements for the first
two quarters of 1999. The Company believes that it needs to have additional
injection of equity or debt capital to meet the Company's anticipated
capital expenditures for the balance of 1999, and the Company actively is
seeking to raise such additional capital through equity or debt financing.
Management's plan for profitable growth has focused on three areas: (1) the
need for additional capital, (2) the broadening of the product base, and (3)
the development of a comprehensive marketing campaign.
(1) Additional Capital. Management has viewed the ability of the Company
to raise funds sufficient to implement new product and marketing strategies
as dependent upon the status of the Company as "public" company. In
November 1998, the Company filed a Form 10-SB with the Securities Exchange
Commission
<PAGE> 44
and became a fully reporting company on January 6, 1999. The Company's
ability to attract a broader potential investor base has been achieved as a
result of this filing. In addition to closing a $1,000,000 financing
transaction ($500,000 in proceeds received, with an additional $500,000
committed upon the filing and effective date of a Form SB-2 registration
statement) on March 9, 1999, the Company has negotiated a private offering
for additional equity financing having maximum proceeds of $2,500,000. That
offering will involve the issuance of a new class of convertible preferred
at a purchase price of $2.50 per share. On April 9, 1999, the Company
received a "term sheet" for this transaction, which has been approved by
management. The Company has been informed that the transaction can be
closed by the end of May 1999
(2) Product Base. For the past 8 to 10 months, the Company has engaged in
a series of marketing studies and taste tests to develop new products for
introduction in 1999. That development has now been complete and,
commencing in July of this year, the Company will introduce a new line of
premium flavored milk (orange, vanilla, pineapple and strawberry - in
addition to plain and chocolate) as well as flavored drinkable yogurt.
These new products will be introduced as part of a comprehensive marketing
campaign in conjunction with Warner Bros.' introduction of its "Looney
Tunes" TM marketing campaign in mainland China.
(3) Marketing Campaign. In January 1999, the Company signed a Master
Licensing Agreement with Warner Brothers Consumer Products Co. and obtained
the right to utilize Warner Brothers' "Looney Tunes"TM character images and
names in the Shanghai and Hangzhou greater metropolitan areas. This
licensing agreement gives the Company exclusive rights with respect to such
images and names in the defined geographic regions for use in connection
with specified categories of products sold by the Company's subsidiaries in
those areas. The Company will introduce these "Looney Tunes"TM products in
the Shanghai and Hangzhou markets in the summer of 1999.
DEBT STRUCTURE
On December 27, 1993, Green Food Peregrine entered into a loan agreement
with a state owned commercial bank in China and obtained a loan of
approximately US $905,819 (RMB7,500,000). This loan matured on December 26,
1996 and bore an interest rate of 12.24% per annum. The loan, which was
guaranteed by China National Green Food, contained an increased interest
rate penalty if repayments were not made on a timely basis. On December 26,
1996, Green Food Peregrine failed to pay off the principal and interest then
due on the loan; the bank thereafter imposed a penalty interest rate of
16.43% per annum on the unpaid accumulated interest due at December 31,
1997. As of that date, Green Food Peregrine had accrued interest payable of
approximately US $257,856 (RMB2,135,000), in addition to the principal of
the loan.
In June, 1998, we renegotiated this loan and obtained a new repayment
schedule, with approximately US $125,606 now becoming due on December 31,
1998, and an additional US $1,038,069 becoming due on December 31, 1999.
The bank further agreed that, as long as Green Food Peregrine completes this
repayment schedule in a timely fashion, the bank will waive the penalty
interest imposed upon the interest calculation. The Company met its
obligations under the renegotiated payment schedule with respect to the
December 31, 1998 payment.
On December 1, 1994, Green Food Peregrine entered into a second loan
agreement with another state owned commercial bank in China and obtained a
loan of approximately US $325,300 (RMB2,700,000). This loan will mature on
December 31, 2001, and bears an interest rate of 9.9% per annum. This
interest
<PAGE> 45
rate is variable and can change in accordance with an annual notice from the
China Central Bank. In December, 1997, Green Food Peregrine failed to pay
off the regular interest and principal then due. As such, the bank imposed
a penalty interest rate of 12.43% per annum on the interest calculation. As
of that date, Green Food Peregrine had accrued interest payable of
approximately US $122,346 (RMB1,013,000) and a current portion of principal
payable of approximately US $120,776 (RMB1,000,000).
In June, 1998, we renegotiated this loan and established a new repayment
schedule with the bank which called for payment of approximately US $90,582
(RMB750,000) by September 20, 1998, and additional payments of approximately
US $50,726 (RMB420,000) at three month intervals through December 20, 1999.
The balance remaining on this loan, if any, is payable on December 31, 1999.
The bank has agreed that, as long as Green Food Peregrine completes this
payment plan in a timely fashion, the bank will release the penalty interest
rate imposed on the interest calculation. The Company is current with this
renegotiated payment schedule.
During the organization period of Green Food Peregrine and in April of 1996,
China National Green Food loaned the aggregate amount of RMB8,600,000 to
Green Food Peregrine. These shareholder loans were converted to paid in
capital in 1997 to satisfy the registered capital requirements of China
National Green Food pursuant to the Green Food Peregrine Articles of
Association. In addition, interest payable of RMB882,721 likewise has been
converted to paid in capital.
In April and November, 1996, China National Green Food loaned an additional
RMB350,000 and RMB200,000, respectively, to Green Food Peregrine to finance
working capital. An interest rate of 12.4% per annum was applied to these
loans. Both of these loans were paid in full in September and October,
1997, respectively.
In January, 1997, the major limited partner of China Peregrine Enterprises
loaned US $200,000 to that limited partnership in order for China Peregrine
Enterprises to meet interim registered capital requirements of the Green
Food Peregrine Articles of Association and Joint Venture Contract. In
March, 1997, three shareholders of the Company together provided a loan of
US $1,315,000 to pay China Peregrine Enterprises' final registered capital
requirement to Green Food Peregrine. This last capital contribution was set
by the Board of Directors of Green Food Peregrine as a condition precedent
to the approval of the Company's acquisition of the interest of China
Peregrine Enterprises in and to the Green Food Peregrine joint venture.
These two loans were paid off during May and June, 1997, utilizing the
proceeds from a Rule 504 regulation D offering by the Company.
In March, 1997, a holder of the majority of the partnership interests in
China Peregrine Enterprises (and a major stockholder in the Company),
together with two other investors in the Company, assumed a US $1,260,000
outstanding line of credit owed by the limited partnership to a Tennessee-
based financial institution. On March 15, 1997, the Company issued
1,260,000 shares of its Series B preferred stock to these shareholders in
consideration for this assumption. The line of credit was paid in full in
October, 1997.
While the above described related party loans have been paid in full, there
can be no assurance that the Company will have the ability to meet the newly
negotiated payment schedule to retire the obligations owing to the two state
owned banks in China, either by utilizing its capital resources or from the
generation of cash flows adequate to support the repayment schedules.
With respect to the Hangzhou Meilijian operation, that joint venture company
obtained revolving lines of credit from major state-owed commercial banks in
China for working capital purposes. These lines of credit allowed the
Company to borrow money up to RMB13 million (approximately US$1,570,000 as
of
<PAGE> 46
December 31, 1998). These lines of credit have terms ranging from three
months to seven months with a floating interest rate at July 31, 1998
ranging from 7.5% to 10% per annum subject to change based on notice from
the central bank, People's Bank of China. In China, these lines of credit
are generally renewable as long as Hangzhou Meilijian pays all interest on a
timely basis .
During the process of acquiring from American Flavor China, Inc. the 52% of
equity interest in and to Hangzhou Meilijian, the Company issued a
promissory note to assume the American Flavor's debt owed to a supplier.
The face value of that note was $282,637.53 at interest rate of 10.5% per
annum without any collateral attached. The note has a monthly installment
payment of $7,250 with 23 payments and a balloon payment of $159,862.38 when
the note will be due on July 15, 2000. The minimum cash payments are
$87,000 in 1999 and approximately $203,462 in 2000. The note has a late
charge article that the Company shall be charged by 3% of overdue principal
and interest installment if the note holder does not receive the payment
within 15 days of due dates
In the course of setting up the Hangzhou Meilijian joint venture, HDC
contributed fixed assets with a value in excess of its required capital
contribution amount. Based on an agreement signed by the Chinese and
American investors, the excess portion was treated as a fixed asset loan
from HDC at an interest 8% per annum. The balance of this loan at December
31, 1998 was $560,080.
On January 1, 1994, HDC provided the Company with the use of its trademark,
which was valued at RMB500,000 (approximately US$60,245). The Company
recorded this trademark value as a part of deferred assets and a shareholder
loan. The Company recorded amortization of RMB50,000 (approximately
US$6,025) per year for trademark and paid cash of RMB50,000 to HDC per year
against the shareholder loan. The balance of this loan at December 31, 1998
was $36,238. Accumulated interest on these loans amounted to $81,265.
EFFECTS OF INFLATION
The Company believes that inflation has not had material effect on its net
sales and results of operations
EFFECT OF FLUCTUATION IN FOREIGN EXCHANGE RATES
The Company's operating subsidiary, Green Food Peregrine, is located in
China. It buys and sells products in China using Chinese renminbi as
functional currency. Based on Chinese government regulation, all foreign
currencies under the category of current account are allowed to freely
exchange with hard currencies. During the past two years of operation,
there were no significant changes in exchange rates. However, there is no
assurance that there will be no significant change in exchange rates in the
near future.
FUTURE OPERATIONS
Since the Company's acquisition of a majority interest in the Hangzhou
Meilijian joint venture has recently occurred, the results of operations for
Hangzhou Meilijian have not been incorporated herein. We anticipate,
however, that the inclusion of the Hangzhou Meilijian operation will have a
significant impact on the financial reporting of the Company in the future.
For example, as of December 31, 1997, Hangzhou Meilijian reported
approximately US $6,240,000 in revenues. Since an audit of the financial
statements of that joint venture under US GAAP and GAAS has not been
completed, however, there can be no assurances that the Hangzhou Meilijian
joint venture will be profitable.
<PAGE> 47
In addition, if the Company is able to raise additional capital to finance
its acquisition of a majority interest in one or more of the state owned
dairies presently under consideration with the Ministry of Agriculture, both
the revenue reports and the profitability of the Company may be affected
materially.
Finally, there can be no assurances of the success of the strategic
marketing plan of the Company with respect to its Shanghai operations, or
the ability to fund that marketing strategy. The successful implementation
of the planned marketing strategy for the Shanghai market could result in a
profitable Shanghai operation within a twelve month period. The success of
the planned marketing strategy, in addition to the above stated factors,
involves the continued focus on consumer acceptance of the qualitative
differences between the products being offered by Green Food Peregrine and
its competitors.
NEW ACCOUNTING STANDARDS NOT ADOPTED YET
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
(SFAS No. 130), which establishes standards for reporting and display of
comprehensive income, its components and accumulated balances.
Comprehensive income is defined to include all changes in equity except
those resulting from investments by owners and distributions to owners.
Among other disclosures, SFAS No. 130 requires that all items that are
required to be recognized under current accounting standards as components
of comprehensive income be reported in a financial statements that is
displayed with the same prominence as other financial statements.
Statement of Financial Accounting Standards No. 131, "Disclosure about
Segments of an Enterprise and Related Information" (SFAS No. 131), which
supersedes SFAS No. 14, "Financial Reporting for Segments of a Business
Enterprise," establishes standards for the way that public enterprises
report information about operating segments in interim financial statements
issued to the public. It also establishes standards for disclosures
regarding products and services, geographic areas and major customers. SFAS
No. 131 defines operating segments as components of an enterprise about
which separate financial information is available that is evaluated
regularly by the chief operating decision maker in deciding how to allocate
resources and in assessing performance.
Both of these new standards are effective for financial statements for
periods beginning after December 15, 1997 and require comparative
information for earlier years to be restated. Due to the recent issuance of
these standards, management has been unable to fully evaluate the impact, if
any, they may have on future financial statement disclosures.
Statement of Financial Accounting Standards No. 132, "Employer's Disclosures
about Pensions and Other Postretirement Benefits" (SFAS No. 132) is
effective for financial statements with fiscal years ending beginning after
December 15, 1997; earlier application is permitted. The new standard
revises employers' disclosures about pension and other postretirement
benefit plans but does not change the measurement or recognition of those
plans. SFAS No. 132 standardizes the disclosure requirements for pensions
and other postretirement benefits to the extent practicable, requires
additional information on changes in the benefit obligations and fair values
of plan assets that will facilitate financial analysis, and eliminates
certain disclosures previously required when no longer useful. The Company
does not expect the adoption of SFAS No. 132 to have a material effect, if
any, on its financial position or results of operations.
Statement of Financial Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS No. 133) requires companies to
recognize all derivatives contracts as either assets or liabilities in the
balance sheet and to measure them at fair value. If certain conditions are
met, a derivative may be
<PAGE> 48
specifically designated as a hedge, the objective of which is to match the
timing of gain or loss recognition on the hedging derivative with the
recognition of (i) the changes in the fair value of the hedged asset or
liability that are attributable to the hedged risk or (ii) the earnings
effect of the hedged forecasted transaction. For a derivative not
designated as a hedging instrument, the gain or loss is recognized in income
in the period of change. SFAS No. 133 is effective for all fiscal quarters
of fiscal years beginning after June 15, 1999.
Historically, the Company has not entered into derivative contracts either
to hedge existing risks or for speculative purposes. Accordingly, the
Company does not expect adoption of the new standard on January 1, 2000 to
affect its financial statements.
The Accounting Standards Executive Committee issued Statement of Position
("SOP") 98-5 "Reporting on the Costs of Start-Up Activities" which will be
effective for financial statements for fiscal years after December 15, 1998
and requires that costs of start-up activities, including organization
costs, be expensed as incurred. In accordance with SOP 98-5, the Company
expects to write off start up costs in its subsidiary in 1999.
YEAR 2000 STATEMENT
We are currently in the process of identifying, evaluating and implementing
changes to computer systems in the United States and the Green Food
Peregrine facility in Shanghai, People's Republic of China, as necessary.
This issue affects computer systems that have date sensitive software
programs or chipsets that may not recognize the year 2000. Systems that do
not recognize such information properly could generate erroneous data or
cause a system to fail, resulting in an interruption of normal business
activities.
We have arranged with a third party vendor the performance of a
comprehensive analysis of the Company's in house computers with respect to
potential Year 2000 problems. Our internal analysis has revealed the
existence of one micro computer which , owing to its age, bears a high risk
of date sensitive operation. We anticipate the completion of the third
party analysis prior to the end of the 1999 second quarter, and immediate
remediation, if necessary, owing to the small number of micro computers
(less than 10) utilized by the Company and its subsidiaries. Given the
benefit to the Company of utilizing technology more advanced than exists in
its present computers, and the utilization of readily available "off the
shelf" hardware and software, the Company is prepared to upgrade or replace
all problem computers immediately, where appropriate.
We have been informed that the cost of the third party analysis and report
will be less than $2,000. Even assuming the need to replace all present
computers and software, we estimate the cost of such replacement to be less
than $30,000.
The Company utilizes computers in its United States operation in a fashion
that is non-essential to the day to day business of the Company. The
computers at the North Palm Beach, FL corporate offices function as word
processors for communication purposes and contain some database information,
which is duplicative of files kept by outside legal, accounting and transfer
agent affiliates. In the Shanghai and Hangzhou facilities, basic record
keeping is both manual and computer assisted. As such, while downtime owing
to date sensitive problems would present an inconvenience to operations, it
would not affect the ability of the Company's subsidiaries to function
appropriately on a day to day basis.
Neither the Company nor its subsidiaries rely upon third parties who are
computer dependent for their respective business functions. As such, we do
not believe that Year 200 problems that may be experienced
<PAGE> 49
by such third parties will have any material effect on our operations in the
United States or in China. Since we utilize readily available hardware and
software in our business, we believe the cost of modifying or replacing all
systems to be Year 2000 compliant will be minimal, and the Company will
modify or replace computers experiencing such problems immediately, without
an appreciable interruption in its operations, financial condition or
results of operations.
DESCRIPTION OF PROPERTY
Neither China Peregrine Food Corporation nor its subsidiary, Green Food
Peregrine, currently owns any real property. As of February 1, 1999, the
Company's corporate offices are located at 11300 US Highway 1, Suite 202,
North, Palm Beach, Florida, pursuant to a lease with HCF Realty, Inc.,
having a term of five years. The Company's current aggregate monthly rent
amounts to approximately $4,900, which will increase (assuming an estimated
annual increase of 2%) to approximately $6,100 per month by the fifth year.
The following properties are currently leased by Green Food Peregrine:
2. Office facilities located in Shanghai presently are rented on a month
to month basis following the expiration of a lease term ending
November 28, 1998, at the rate of RMB16,520 per month (approximately
US $1,990). A new lease term will be negotiated for this space during
the later part of March, 1999.
3. A ground lease for the land on which the dairy processing facility is
located for a term ending June 30, 2043, at the rate of RMB25,000.00
per month (approximately US $3,012).
4. Distribution center located in Shanghai, for a monthly tenancy, at the
rate of RMB 8,500 per month (approximately US $1,025).
While Green Food Peregrine does not own any real estate, it does own the
buildings located on the land, which is subject to the above described
ground lease. As of December 31, 1997, the plant and buildings comprising
the Shanghai facility are carried on the books of Green Food Peregrine at a
net book value of US $495,661.
Currently, the Company does not have a policy to acquire property for
possible capital gains or income generation. In addition, the Company does
not invest in securities of real estate entities or developed or
underdeveloped properties.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Loans/Fees
- ----------
During the organization period of Green Food Peregrine, China National Green
Food Corporation, one of the three partners of Green Food Peregrine, wired
RMB6,600,000 in the form of shareholder's loan to Green Food Peregrine to
finance its activities. In April, 1996, China National Green Food
Corporation
<PAGE> 50
wired another RMB2,000,000 in the form of shareholder's loan to GFP. All
these shareholder's loans have been converted to paid-in capital to satisfy
the registered capital requirements contained in the Article of Association
of Green Food Peregrine. To date, a total of interest payable of RMB882,721
has been converted to paid-in capital as the registered capital of China
National Green Food Corporation.
In April and November, 1996, China National Green Food loaned an additional
RMB350,000 and RMB200,000, respectively, to Green Food Peregrine to finance
working capital. An interest rate of 12.4% per annum was applied to these
loans. Both of these loans were paid in full in September and October,
1997, respectively.
In 1996, Amer-China, one of three partners of Green Food Peregrine, provided
Green Food Peregrine with consulting services, such as English translation
and negotiation supporting services in the U.S., and charged a total of
$36,000 to Green Food Peregrine. The charge was accounted for consulting
expense in Green Food Peregrine's books.
In February, 1997 the Company issued 25,000 shares of common stock in
exchange for 100% of equity interest of Manor Products Corp. (Manor). Manor
was a Delaware company established on January 10, 1996. In early 1996, 80%
of equity interest of Manor was bought by the principal of the initial
founding entity of the Company. Accordingly, this acquisition was regarded
as a related party transaction.
In January, 1997, the major limited partner of China Peregrine Enterprises
loaned US $200,000 to that limited partnership in order for China Peregrine
Enterprises to meet interim registered capital requirements of the Green
Food Peregrine Articles of Association and Joint Venture Contract. In
March, 1997, three shareholders of the Company together provided a loan of
US $1,315,000 to pay China Peregrine Enterprises' final registered capital
requirement to Green Food Peregrine. This last capital contribution was set
by the Board of Directors of Green Food Peregrine as a condition precedent
to the approval of the Company's acquisition of the interest of China
Peregrine Enterprises in and to the Green Food Peregrine joint venture.
These two loans were paid off during May and June, 1997, utilizing the
proceeds from a Rule 504 regulation D offering by the Company.
In March, 1997, a holder of the majority of the partnership interests in
China Peregrine Enterprises (and a major stockholder in the Company),
together with two other investors in the Company, assumed a US $1,260,000
outstanding line of credit owed by the limited partnership to a Tennessee-
based financial institution. On March 15, 1997, the Company issued
1,260,000 shares of its Series B preferred stock to these shareholders in
consideration for this assumption. The line of credit was paid in full in
October, 1997.
In the course of setting up the Hangzhou Meilijian joint venture, HDC
contributed fixed assets with a value in excess of its required capital
contribution amount. Based on an agreement signed by the Chinese and
American investors, the excess portion was treated as a fixed asset loan
from HDC at an interest 8% per annum. The balance of this loan at December
31, 1998 was $560,080.
On January 1, 1994, HDC provided the Company with the use of its trademark,
which was valued at RMB500,000 (approximately US$60,245). The Company
recorded this trademark value as a part of deferred assets and a shareholder
loan. The Company recorded amortization of RMB50,000 (approximately
US$6,025) per year for trademark and paid cash of RMB50,000 to HDC per year
against the shareholder loan. The balance of this loan at December 31, 1998
was $36,238. Accumulated interest on these loans amounted to $81,265.
<PAGE> 51
Relationships
- -------------
Mr. Paul Downes has investment power with respect to the affairs of Tamarind
Management, Ltd. Accordingly, the Company's securities held by Mr. Downes
and Tamarind have been combined in this document for reporting purposes.
The Downes/Tamarind ownership of issued and underlying shares of common
stock, Series B Preferred Stock and Options represents 15.87% of all issued
and outstanding common stock and shares of common stock underlying the
Series A and B Preferred plus unexercised options and warrants.
Similarly, insofar as Mr. Charles Beech has investment power with respect to
the affairs of Peregrine Enterprises, Inc. The Company's securities held by
Mr. Beech and Peregrine Enterprises likewise have been combined in this
document for reporting purposes. The Beech/Peregrine Enterprises ownership
of issued and underlying shares of common stock and Options represents 7.71%
of all issued and outstanding common stock and shares of common stock
underlying the Series A and B Preferred plus unexercised options and
warrants.
The Company purchased the assets of China Peregrine Enterprises, Limited
(China Peregrine Enterprises) in March of 1997, in exchange for 1,040,000
shares of the common stock of the Company. At the time of this asset
purchase, Mr. Dale Reese was the major equity holder in the China Peregrine
Enterprises limited partnership and Mr. Charles Beech "controlled" the
activities of China Peregrine Enterprises by virtue of his control of China
Peregrine International, Inc., the General Partner of China Peregrine
Enterprises. At the time of the asset purchase, Messrs. Reese and Beech
were two of the three directors of the Company. As noted above, through the
assumption of a loan in excess of one million dollars owed by China
Peregrine Enterprises to a Tennessee bank, and by virtue of his position as
a founder of the Company, and through stock purchases, Mr. Reese presently
holds a 22.75% interest in the equity of the Company. Similarly, Mr. Beech,
directly and through Peregrine Enterprises, Inc., presently holds 7.71% of
such equity.
MARKET FOR COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
Market Price
- ------------
Of the 7,795,462 shares of the Company's Common Stock issued and outstanding
as of April 16, 1999, approximately 1,000,000 shares are and have been
subject to over-the-counter trading on the NASD OTC Electronic Bulletin
Board, since October 24, 1997. The following quarterly quotations for Common
Stock transactions on the OTC Bulletin Board reflect inter-dealer prices,
without retail mark-up, mark-down or commissions and may not represent
actual transactions.
<TABLE>
<CAPTION>
QUARTER HIGH BID PRICE LOW BID PRICE
------- -------------- -------------
<C> <S> <C> <C>
1997 Q4 (10/1 - 12/31) $6.87 $3.00
1998 Q1 (1/3 - 3/31) $4.10 $2.10
Q2 (4/1 - 6/30) $2.60 $0.60
Q3 (7/1 - 9/30) $2.50 $0.33
Q4 (10/1 - 12/31) $2.25 $1.00
1999 Q1 (1/3 - 3/31) $3.06 $0.75
</TABLE>
Non-Market Equity Subject to Options, Warrants and Conversion
- -------------------------------------------------------------
Stock Warrants and Options
- --------------------------
The Company issued warrants for 975,000 shares of common stock as part of
the units sold in the Rule 504, Regulation D limited public offering. These
warrants may be exercised at any time after May 31, 1998, and from time to
time thereafter through and including March 31, 1999, at $5.00 per share of
common stock purchased. The common stock underlying these Warrants are not
part of or covered by the 1997 504 limited public offering.
During 1997, the Company signed a total of four stock options agreements
with certain shareholders and non-employee directors. These four stock
option agreements are summarized as follows:
<TABLE>
<CAPTION>
Granting Options Exercise Vesting Expiration
Date Granted Price Period Date
-------- ------- -------- ------- ----------
<S> <C> <C> <C> <C> <C>
Agreement One 4/29/97 1,005,533 $1.00 None 4/28/2002
Agreement Two 4/30/97 2,000,000 $1.00 None 4/29/2002
Agreement Three 10/1/97 25,000 $1.00 None 9/30/2002
Agreement Four 10/1/97 15,000 $1.00 None 9/30/2002
---------
Total options granted in 1997 3,045,533
=========
</TABLE>
On May 2, 1998, the Company issued 557,000 units (each unit composed of one
share of common stock and one warrant to purchase one share of common stock)
at a price of $2.50 per unit, pursuant to a private offering in accordance
with the exemption provided in Regulation D, Rule 506. The holders of such
warrants are entitled to purchase, from time to time, up to 557,000 shares
of common stock, at an exercise price of $1.00 per share, at any time after
June 30, 1998 and through and including June 30, 2003.
On November 23, 1998, the Company issued 83,334 shares of its Series C
Convertible Preferred Stock, and 50,000 shares of such stock on January 4,
1999, pursuant to a Rule 504, Regulation D. limited public offering.
Associated with this 504 offering was the grant of 533,335 Warrants for the
Company's Common Stock. at an exercise price of $1.00 per share. Of the
Warrants granted, 83,334 expire May 10, 1999, and 450,000 Warrants will
expire April 30, 1999.
Convertible Preferred
- ---------------------
Series A: In February, 1997, the Company reorganized its members of the
founding group. As a result, the total founders increased from one entity
to three individuals and two entities. Consequently, 788,000 shares of
common stock and 500,000 shares of preferred stock at par value of $0.001
per share were issued to the newly joined founders, pursuant to the
exemption from Section 5 registration provided by Section 4(2) of the
Securities Act of 1933 (the Act).
Each share of Series A preferred stock entitles its holder to receive
dividends at the same rate paid to
<PAGE> 53
common shareholders. Each share of Series A preferred stock is convertible
into one share of common stock, as adjusted, for such things as stock split,
stock dividends and other similar dilutive occurrences. At any time
subsequent to December 31, 1997, the holder of each share of Series A
preferred stock is allowed to convert all or part of the Series A preferred
shares into corresponding shares of common stock on a one for one basis.
Series B: On March 15, 1997, the Company issued 1,260,000 shares of Series B
Convertible Preferred Stock, pursuant to Section 4(2) of the Act, at stated
value of $1.00 per share to three shareholders in consideration of their
assumption of the obligation to pay off approximately $1,260,000 of an
outstanding line of credit owed by CPEL to a Tennessee-based financial
institute.
Each share of Series B preferred stock is convertible into one share of
common stock, as adjusted, for such things as stock split, stock dividends
and other similar dilutive occurrences. At any time subsequent to December
31, 1998 the holder of each share of Series B preferred stock, is allowed to
convert all of part of the Series B preferred shares into corresponding
shares of common stock. Each share of Series B preferred stock entitles its
holder to accumulate dividends at 9% per annum, even if the dividends are
payable only upon dissolution and liquidation of the Company and redemption
called by the Company. However, each share of Series B preferred stock
entitles its holder to receive dividends at the same rate paid to common
shareholders if the Company declares or pays dividends to common
shareholders. The shares of Series B preferred stock are redeemable at
$1.00 per share totaling $1,260,000 called by the Company any time after
December 31, 1998.
Series C: On November 23, 1998 and January 4, 1999, respectively, the
Company issued 133,334 shares of Series C Convertible Preferred Stock,
pursuant to a Rule 504, Regulation D limited public offering, at a stated
value of $3.00 per share to two corporate investors. The proceeds of this
504 offering were used by the Company to fund an increase of its equity
share of the registered capital in the Green Food Peregrine joint venture.
Series C Convertible Preferred Stock shall pay or accrue dividends at the
rate of 8% per annum, as a percentage of the Stated Value, payable in cash
or Common Stock quarterly, at the option of the Company. Accrued dividends
shall be payable upon conversion or redemption Upon any liquidation,
dissolution or winding-up of the Company, whether voluntary or involuntary,
but subject to the Liquidation rights of the holders of Series A and Series
B Convertible Preferred Stock, the holders of Series C Convertible Preferred
Stock shall be entitled to receive out of the assets of the Company, whether
such assets are capital or surplus, for each share of Series C Convertible
Preferred Stock an amount equal to the Stated Value plus all accrued but
unpaid dividends per share, whether declared or not, before any distribution
or payment shall be made to the holders of any Junior Securities, and if the
assets of the Company shall be insufficient to pay in full such amounts,
then the entire assets to be distributed to the holders of Series C
Convertible Preferred Stock shall be distributed among the holders of Series
C Convertible Preferred Stock ratably in accordance with the respective
amounts that would be payable on such shares if all amounts payable thereon
were paid in full. The Company shall have the right, at the Company's
option, to redeem all or a portion of the Series C Convertible Preferred
Stock at a price per share equal to the sum of (a) the Stated Value and (b)
a sum equal to ten percent (10%) of the Stated Value, computed on a simple
interest, non-compounded, and non-annualized basis.
Rule 144 Stock
- --------------
Of the 7,795,462 shares of Common Stock presently issued and outstanding,
1,388,456 shares have been held by non-affiliates of the Company for in
excess of one year; an additional 2,695,544 shares of
<PAGE> 54
Common Stock have been held by affiliates for in excess of one year. These
shares may be sold pursuant to Rule 144, subject to the volume and other
limitations set forth under Rule 144. In general, under Rule 144 as
currently in effect, a person (or persons whose shares are aggregated) who
has beneficially owned restricted shares of the Company for at least one
year is entitled to sell, within any three-month period and in accordance
with an approved manner of sale, an amount of shares that does not exceed
the greater of (i) the average weekly trading volume in the Company's common
stock during the four calendar weeks preceding such sale, or (ii) 1% of the
shares then outstanding. A person who is not deemed to be an "affiliate" of
the Company and who has held restricted shares for at least two years would
be entitled to sell such shares without regard to the resale limitations of
Rule 144.
Holders at April 16, 1999
- -------------------------
<TABLE>
<S> <C> <C>
Common Stock 7,795,462 shares 442 holders
Preferred Stock (Series A) 500,000 shares 1 holder
Preferred Stock (Series B) 1,260,000 shares 3 holders
Preferred Stock (Series C) 58,715 shares 1 holder
Preferred Stock (Series D) 53,500 shares 4 holders
</TABLE>
Dividends
- ---------
The Company has not paid dividends on its Common Stock and does not
anticipate paying dividends. The Company intends to retain future earnings,
if any, to finance working capital, to expand its operations, and to pursue
its acquisition strategy.
The holders of Common Stock are entitled to receive, pro rata, such
dividends and other distributions as and when declared by the Company's
Board of Directors out of the assets and funds legally available therefor.
The availability of funds to the Company is dependent upon dividends or
distribution of profits from its subsidiaries, and may be subject to
regulatory control and approval by the appropriate government authorities on
either a regional or national level in the People's Republic of China.
The Company has accrued dividends for its Series B Convertible Preferred
Stock in the amount of $85,050.00, as of December 31, 1997 and $170,110 as
of September 30, 1998. In addition, the Company will book a dividend charge
in 1998 and 1999 resulting from the less than market conversion price for
Company's common stock pursuant to the terms of the Series C Convertible
Preferred Stock.
EXECUTIVE COMPENSATION
Summary Compensation Table
- --------------------------
The following table relates to executive compensation paid during 1997 and
1998
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
---------------------------- ----------------------------
Stock
Awards
Name & Position Salary Bonus Total (Restricted) Options(2)
- --------------- ------ ----- ----- ------------ ----------
<S> <C> <C> <C> <C> <C>
Roy G. Warren(1) $120,000 $120,000 410,914
President
[8/15/97 to date]
George Holdsworth
President
[4/20/97 to 8/15/97]
Chief Operating Officer
[4/20/97 to 4/30/98]
Charles Beech(3) 510,914
Chairman
[4/20/97 to 6/1/97
and 4/30/98 to date]
Chief Executive Officer
[4/20/97 to date]
Dale Reese 700,000
Chairman/Treasurer
[6/1/97 to 8/15/97]
Paul Downes (4) 1,383,705
Chairman
[8/15/97 to 4/30/98]
Philip Pearce 25,000(5)
Director
[4/20/97 to date]
<FN>
<F1> (1) At the rate of $10,000 per month (partial year 1997, $80,000).
<F2> (2) The Options listed above were authorized by a Directors'
resolution on April 20, 1997. At that time, a market did not
exist for the Company's unrestricted shares, which had a par
value of $0.001.
<F3> (3) Prior to March of 1997, the executive officer of the Company's
predecessor, China Peregrine Enterprises, Limited (CPEL), was
compensated through his equity interests in that partnership
entity for his limited day to day function in the running of the
U.S. operation of CPEL. Upon the receipt of the Company's common
stock in exchange for assets, China Peregrine Enterprises,
Limited .made a distribution of that common stock to its equity
participants in accordance with their respective equity interests
<F4> (4) These options were granted to Tamarind Management, Ltd., an
affiliate of Mr. Downes.
<F6> (5) Issued in 1997.
</FN>
</TABLE>
Option Grant Table
- ------------------
<TABLE>
<CAPTION>
Securities
-------------------------
Underlying Percentage Per Share Expiration
Name & Position Options(1) of Total Exercise $ Date
- --------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Roy G. Warren 160,914 5.30% $1.00 4-28-2002
President 250,000 8.25% $1.00 4-29-2002
[8/15/97 to date]
Charles Beech 160,914 5.30% $1.00 4-28-2002
Chairman 350,000 11.54% $1.00 4-29-2002
[4/20/97 to 6/1/97
and 4/30/98 to date]
Chief Executive Officer
[4/20/97 to date]
Dale Reese 700,000 23.09% $1.00 4-29-2002
Chairman/Treasurer
[6/1/97 to 8/15/97]
Paul Downes (2) 683,705 22.56% $1.00 4-28-2002
Chairman 700,000 23.09% $1.00 4-29-2002
[8/15/97 to 4/30/98]
<FN>
<F1> (1) The Options listed above are exercisable for Common Stock, which
has a par value of $0.001.
<F2> (2) These options were granted to Tamarind Management, Ltd., an
affiliate of Mr. Downes.
</FN>
</TABLE>
Aggregated 1998 Fiscal Year End Option Value Table
- --------------------------------------------------
<TABLE>
<CAPTION>
Value of
"In The Money"
Securities Underlying Unexercised Options
Name & Position Unexercised Options(1) at 12-31-98(2)
- --------------- ---------------------- -------------------
<S> <C> <C>
Roy G. Warren 410,914 $-0-
President
[8/15/97 to date]
Charles Beech 510,914 $-0-
Chairman
[4/20/97 to 6/1/97
and 4/30/98 to date]
Chief Executive Officer
[4/20/97 to date]
Dale Reese 700,000 $-0-
Chairman/Treasurer
[6/1/97 to 8/15/97]
Paul Downes (3) 1,383,705 $-0-
Chairman
[8/15/97 to 4/30/98]
<FN>
<F1> (1) The Options listed above were authorized by a Directors'
resolution on April 20, 1997. At that time, a market did not
exist for the Company's unrestricted shares, which had a par
value of $0.001.
<F2> (2) On December 31, 1998, the Company's unrestricted common stock was
quoted on the NASD Over The Counter Electronic Bulletin Board at
a closing price of $1.00; the reported dollar values represent
the "in-the money" value of the options listed as of the 1997
year end.
<F3> (3) These options were granted to Tamarind Management, Ltd., an
affiliate of Mr. Downes.
</FN>
</TABLE>
Employment Contracts
- --------------------
There are no written employment contracts for the individuals listed in this
item.
FINANCIAL STATEMENTS
CHINA PEREGRINE FOOD CORPORATION AND SUBSIDIARY
____________________________
REPORT ON AUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
____________________________
China Peregrine Food Corporation and Subsidiary
Index to Consolidated Financial Statements
Report of Independent Certified Public Accountants F-3
Consolidated Financial Statements
Balance Sheets F-3
Statements of Operations and Comprehensive Loss F-5
Statement of Shareholders' Equity F-6
Statements of Cash Flows F-9
Summary of Accounting Policies F-11
Notes to Financial Statements F-15
Report of Independent Certified Public Accountants
To the Board of Directors
China Peregrine Food Corporation and Subsidiary
We have audited the accompanying consolidated balance sheets of China
Peregrine Food Corporation (a Delaware corporation) and subsidiary as of
December 31, 1997 and 1998, and the related consolidated statements of
operations and comprehensive loss, shareholders' equity and cash flows for
each of the two years in the period ended December 31, 1998. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards in the United States. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the consolidated financial statements. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation of the
financial statements. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of China
Peregrine Food Corporation and subsidiary as of December 31, 1997 and 1998,
and the results of their operations and their cash flows for each of the two
years in the period ended December 31, 1998 in conformity with generally
accepted accounting principles in the United States.
/s/ BDO Seidman, LLP
Los Angeles, California
March 31, 1999
CHINA PEREGRINE FOOD CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-------------------------
1997 1998
-------------------------
<S> <C> <C>
Assets (Note 3)
Current assets
Cash and cash equivalents $ 435,630 $ 748,590
Accounts receivable, less allowances for doubtful
accounts of $20,546 and $848,116 390,132 509,717
Subscription receivable - 235,000
Other receivable 18,135 73,963
Inventory (Note 1) 77,547 868,238
VAT refund receivable 31,525 51,069
Prepaid expenses 119,611 84,877
Deposits 24,693 19,727
-------------------------
Total current assets 1,097,273 2,597,181
Property, plant and equipment, net (Notes 2 and 3) 1,692,141 5,806,767
Construction in progress 138,501 55,735
Goodwill - 293,096
Trademark and other deferred expenses - 119,827
Proprietary technology, net 60,593 52,242
Start up costs, net 428,389 248,732
-------------------------
Total assets $3,416,897 $9,173,580
=========================
Liabilities and Shareholders' Equity
Current liabilities
Bank loans in Meilijian (Note 3) $ - $1,425,345
Bank loans in GFP (Note 3) 905,819 1,147,523
Current portion of long-term bank loan in GFP (Note 3) 120,776 -
Current portion of note payable - 58,104
Accounts payable 215,381 868,760
Accrued liabilities 800,064 1,178,563
Accrued payroll - 39,162
Advances from customers 10,681 241,354
Dividends payable 85,050 200,667
-------------------------
Total current liabilities 2,137,771 5,159,478
Note payable, less current portion (Note 4) - 192,741
Long term bank loan in GFP, less current portion (Note 3) 205,319 -
Long-term related party loan (Note 4) - 677,583
-------------------------
Total liabilities 2,343,090 6,029,802
Minority interest 265,831 1,128,787
Commitments and contingencies (Note 1 and 10)
Shareholders' Equity (Notes 8 and 9):
Series A convertible preferred stock, par value $0.001 per share,
500,000 shares authorized, 500,000 shares issued and
outstanding 500 500
Series B convertible, 9% cumulative, and redeemable preferred
Stock, stated value $1.00 per share, 1,260,000 shares authorized,
1,260,000 shares issued and outstanding, redeemable at
$1,260,000 1,260,000 1,260,000
Series C convertiable, 8% cummulative and redeemable
Preferred stock, stated value $3.00 per share, 83,334
Shares issued and outstanding - 250,000
Common stock, par value $0.001 per share, 20,000,000 shares
Authorized, 5,289,000 and 7,717,957 shares issued and
Outstanding 5,289 7,718
Stock subscribed - 235,000
Additional paid-in capital 4,075,130 7,427,082
Accumulated deficit (4,370,266) (7,031,046)
Accumulated other comprehensive loss (162,677) (134,263)
-------------------------
Total shareholders' equity 807,976 2,014,991
-------------------------
Total liabilities and shareholders' equity $3,416,897 $9,173,580
=========================
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
CHINA PEREGRINE FOOD CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
<TABLE>
<CAPTION>
Years ended December 31,
---------------------------
1997 1998
---------------------------
<S> <C> <C>
Net sales $ 730,195 $ 2,870,714
Cost of goods sold 852,277 2,859,694
---------------------------
Gross margin (loss) (122,082) 11,020
Selling expense 380,836 523,465
General and administrative expense 1,873,360 2,106,641
---------------------------
Loss from operations (2,376,278) (2,619,086)
Other (income) expense:
Interest expense, net 234,517 299,735
Other - net (58,200) 97,327
---------------------------
Loss before income taxes (2,552,595) (3,016,148)
Income taxes (Note 6) - -
---------------------------
Loss before minority interest (2,552,595) (3,016,148)
Less loss of subsidiaries attributable to minority interest (474,007) (554,319)
---------------------------
Net loss (2,078,588) (2,461,829)
Dividends accrued for Series B preferred stock 85,050 113,400
Dividends accrued for Series C preferred stock - 85,551
---------------------------
Net loss applicable to common shares $(2,163,638) $(2,660,781)
===========================
Loss per share $ (0.59) $ (0.41)
===========================
Weighted average number of common shares outstanding 3,681,827 6,430,337
===========================
Comprehensive loss and its components consist of the following:
Net loss $(2,078,588) $(2,461,829)
Foreign currency translation adjustment 1,839 28,414
---------------------------
Comprehensive loss $(2,076,749) $(2,433,415)
===========================
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
CHINA PEREGRINE FOOD CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
<TABLE>
<CAPTION>
Accumulated
Additional Other
Paid-In Accumulated Stock Comprehensive
Shares Amount Shares Amount Capital Deficit Subscribed Loss Total
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 - $ - 1,040,000 1,040 908,115 (2,206,628) (164,516) (1,461,989)
Recapitalization 500,000 500 1,285,000 1,285 1,785
Issuance of Series B
preferred stock 1,260,000 1,260,000 1,260,000
Assumption of CPEL's accrued
legal fees 200,000 200 199,800 200,000
Issuance of stock for legal
fees for fund raising 15,000 15 14,985 15,000
Issuance of stock for stock
promotion service 100,000 100 99,900 100,000
Issuance of stock for
finder's fees 35,000 35 34,965 35,000
Rule 504 Regulation D
issuance 975,000 975 974,025 975,000
Issuance of stock for
finders' fee 10,000 10 9,990 10,000
Rule 144 issuance 1,320,000 1,320 1,318,680 1,320,000
Issuance of stock for
consulting service 24,000 24 23,976 24,000
Issuance of stock for
accounting service 15,000 15 14,985 15,000
Rule 144 issuance 200,000 200 199,800 200,000
Issuance of stock for
consulting service 25,000 25 24,975 25,000
Issuance of stock for a
director's fee 25,000 25 24,975 25,000
Issuance of stock for travel
expense 20,000 20 19,980 20,000
Net loss (2,078,588) (2,078,588)
Compensation due to issuance
of options 205,979 205,979
Preferred stock dividends
accrued (85,050) (85,050)
Translation adjustments 1,839 1,839
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 1,760,000 $1,260,500 5,289,000 $5,289 $4,075,130 $(4,370,266) $(162,677) $ 807,976
=================================================================================================================================
Issuance of stock in
exchange for stock
promotion service 50,000 50 49,950 50,000
Issuance of stock to acquire
2.4% interest in GFP 120,000 120 119,880 120,000
Issuance of stock to in
exchange for furniture
purchases 5,272 5 11,857 11,862
Rule 506 Regulation D
issuance 557,000 557 1,391,943 1,392,500
Issuance of stock to acquire
52% interest in Meilijian 1,531,685 1,532 1,530,153 1,531,685
Issuance of stock for
warrants exercised 165,000 165 164,835 100,000 265,000
Issuance of Series C
preferred to Utah Resource
International, Inc. 83,334 250,000 250,000
Deemed dividends 83,334 (83,334) 0
Stock subscribed 135,000 135,000
Net loss (2,461,829) (2,461,829)
Series B preferred stock
dividends (113,400) (113,400)
Series C preferred stock
dividends (2,217) (2,217)
Translation adjustments 28,414 28,414
Balance, December 31, 1998 2,010,000 $1,510,500 7,717,957 $7,718 $7,427,802 $(7,031,046) 235,000 $(134,263) $2,014,991
=================================================================================================
</TABLE>
CHINA PEREGRINE FOOD CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------
1997 1998
-----------------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(2,163,638) $(2,461,829)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 398,261 732,684
Provision for bad debts 7,362 16,178
Inventory provision - 37,291
Loss on disposal of fixed assets 869 108,459
Stock issuance in exchange for services and expenses 269,000 66,862
Directors compensation for options granted 205,979 -
Minority interest (474,007) 862,957
Increase (decrease) from changes in:
Accounts receivable (146,986) (732,544)
Other receivable 11,976 (255,441)
Inventory (28,216) (746,725)
VAT refund receivable (4,366) (25,543)
Prepaids and other assets (124,126) 8,734
Accounts payable (153,644) 691,402
Advances from customers - 230,673
Accrued liabilities 186,683 261,444
Dividends payable 85,050
-----------------------------
Net cash provided by (used in) operating activities (1,929,803) (1,205,398)
-----------------------------
Cash flows from investing activities
Purchase of equipment and machinery (128,727) (81,787)
Additions to construction in progress - (3,570)
Acquisition American Flavors interest - (236,980)
-----------------------------
Net cash used in investing activities: (128,727) (322,337)
-----------------------------
Cash flows from financing activities:
Proceeds of related party loans 1,515,000 -
Repayment of related party loan (1,581,279) -
Repayment on notes payable - (32,000)
Increase in related party loan - 16,787
Proceeds of Series A preferred stock 500 -
Proceeds of issuance to founders 1,285 -
Proceeds from Rule 504 offering 975,000 -
Proceeds from Rule 144 offering 1,520,000 -
Proceeds from Rule 506 offering - 1,387,500
Proceeds of Series C preferred stock - 250,000
Proceeds from warrants exercised - 165,000
-----------------------------
Net cash provided by financing activities 2,430,506 1,787,287
-----------------------------
Effect of exchange rate changes on cash 5,468 53,409
-----------------------------
Net increase in cash and cash equivalents 377,444 312,960
Cash and cash equivalents, beginning of year 58,186 435,630
-----------------------------
Cash and cash equivalents, end of year $ 435,630 $ 748,590
=============================
Cash paid during the year:
Interest $ 211,096 $ 265,523
</TABLE>
Supplemental Disclosure of Non-Cash Activities:
In 1997 the Company issued 1,260,000 shares of Series B preferred stock at
a stated value of $1.00 per share to three shareholders in consideration
for their assumption of the obligation to repay $1,260,000 of a line of
credit utilized by CPEL for operations during 1995 and 1996.
In 1997, the Company issued a total of 469,000 shares of common stock at
$1.00 per share to various individuals and entities in connection with the
assumption of the obligation to repay accrued legal expense of $200,000
incurred by CPEL and the payment of various services or expense aggregating
$269,000. Please see details in Note 9.
In 1997, the Company granted to four non-employee directors 1,638,828
options to purchase common stock. According to SFAS 123, the Company
recognized compensation expense of $205,979 by adding the same amount to
additional paid-in capital.
In January 1998, the Company issued 50,000 shares of common stock at $1.00
per share in exchange for stock promotion services provided by a capital
service company.
On February 2, 1998, the Company issued 5,272 shares of common stock at
$2.25 per share to an individual in exchange for his services in connection
with the furnishing of the Company's corporate office.
On February 19, 1998 the Company issued 120,000 shares of common stock at
$1.00 per share to Amer-China Partners, Limited (ACPL) pursuant to a signed
agreement dated October 1, 1997 to acquire all of ACPL's interest and rights
(2.4%) in and to the Green Food Peregrine Children's Food Co. Ltd.
On May 2, 1998, as part of a Rule 506 Regulation D offering, the Company
issued 2,000 shares of common stock at $2.50 per share in exchange for
accounting services provided by two existing shareholders.
On August 8, 1998 the Company issued 1,531,685 shares of common stock at
$1.00 per share as consideration for 52% of American Flavor China's interest
in and rights to Hangzhou Meilijian Dairy Products Co. Ltd.
On December 29, 1998, the Company sold 50,000 shares of Series C preferred
stock to an institutional investor at $3.00 per share with 450,000 warrants
attached at an exercise price of $1.00 per share expiring at April 30, 1999.
Accordingly, the Company recorded a stock subscription of $135,000, net of
expense of $15,000 as of December 31, 1998. The Company received the
proceeds of $135,000 on January 4, 1999.
On October 1998, the Board of Directors of the Company decided to reduce
the exercise price of warrants issued during the Rule 504, Regulation D
offering in 1997 from $5.00 to $1.00. Subsequently, certain holders of
265,000 warrants exercised their warrants at $1.00 per share. The Company
issued 165,000 shares of common stock in December and recorded $100,000 of
stock subscribed as of December 31, 1998, which has been fully collected in
February 1999.
See accompanying summary of accounting policies and notes to consolidated
financial statements.
CHINA PEREGRINE FOOD CORPORATION AND SUBSIDIARY
SUMMARY OF ACCOUNTING POLICIES
Basis of Presentation
China Peregrine Food Corporation (formerly Shakespeare Holding, Inc.) (the
Company) was incorporated under the laws of the State of Delaware on April
26, 1996. Shakespeare Holdings, Inc. was a shell company without any
substantial assets and operating activities until it merged with China
Peregrine Enterprises, Ltd. in March, 1997.
In February, 1997, the Company issued 25,000 shares of common stock to
acquire a 100% equity interest in Manor Products Corp. (Manor), a Delaware
company, established on January 26, 1996. Manor was a shell company with
331 shareholders.
On March 5, 1997, the Company issued 1,040,000 shares of its common stock
in exchange for a 100% equity interest in China Peregrine Enterprise,
Limited (CPEL). CPEL was a Texas limited partnership, which was created
for the sole purpose of controlling the operation of a joint venture in
Shanghai, China known as Green Food Peregrine Children's Food Co. Ltd.
Green Food Peregrine Children's Food Co. Ltd. (GFP) is a foreign investment
equity joint venture with registered capital of US$5 million and
established under the law of People's Republic of China on July 3, 1993.
The Company accounted for 67.6%, China National Green Food Corporation
accounted for 30%, and Amer-China, an Illinois limited partnership,
accounted for 2.4% of the GFP's equity interest as of December 31, 1997.
GFP has been focusing on providing better nutrition for infants and
children in China through the development of advanced food technology and
marketing expertise from the West. Currently, GFP is manufacturing and
distributing dairy products in Shanghai, China and is developing a number
of new and non-carbonated beverages for infants and school age children.
GFP has intentions to operate in the cities with a population more than 2
million throughout China.
On May 2, 1998, the Company approved and ratified an agreement between the
Company and China National Green Food Corporation to satisfy the need for
additional capital for GFP by the contribution of $1,500,000 by the Company
over the next 18 months. This contribution will constitute an increase in
the registered capital in GFP attributed to the Company and a commensurate
increase in the equity holding of the Company in GFP from 70% (after the
approval of the Company's acquisition of ACPL's equity interest) to 76.92%.
In addition, the right to match this additional capital contribution to
maintain the status quo of the investment has been waived by China National
Green Food Corporation.
In line with Chinese government regulations, the change of investment ratio
in GFP must be approved by the Ministry of Foreign Trade and Economic
Cooperation (MOFTEC) in China. Therefore, the Company has agreed to
provide an interim loan of $500,000 in traunches to GFP and convert this
loan into registered capital upon obtaining MOFTEC's approval.
This issuance of the Company's common stock to the former CPEL's partners
made the Company become an active operating entity. Generally accepted
accounting principles requires that the company whose stockholders retain
the majority interest in a combined business be treated as the acquirer for
accounting purpose, therefore, this transaction has been accounted for as a
"reverse acquisition" for financial reporting purposes. The relevant
acquisition process utilizes the capital structure of Shakespeare Holdings,
Inc. and the assets and liabilities of CPEL and its subsidiary are recorded
at their historical cost.
CPEL is the continuing operating entity for financial reporting purposes
and the financial statements prior to March 5, 1997 represent CPEL's
financial position and results of operations. The assets of $1,785 and
shareholders' equity of $1,785 of Shakespeare Holdings, Inc. are included
as of March 5, 1997. Although CPEL is deemed to be the acquiring company
for financial accounting and reporting purpose, the legal status of the
Company as the surviving corporation does not change.
Concurrent with the reverse acquisition, the Company changed its corporate
name from Shakespeare Holdings, Inc. to China Peregrine Food Corporation
with headquarters located in West Palm Beach, Florida.
On June 18, 1998, the Company entered into a definitive agreement with
American Flavor China, Inc. a U.S. based entity to acquire its 52% equity
interest in Hangzhou Meilijian Dairy Products, Co. Ltd. (HMDP) This
acquisition transaction was effective on August 1, 1998. The terms of this
acquisition are as follows: 1) to assume $285,637 of debt of American
Flavor China, Inc., 2) to pay cash of $210,000, and 3) to issue 1,531,685
shares of the Company's common stock at $1 per share. As a result of this
acquisition transaction, the Company recognized goodwill of $319,741, which
will be amortized over a period of five years on a straight-line basis.
The Company has suffered recurring losses from operations and had negative
working capital. Management of the Company has taken and continues to take
various steps to raise necessary funds for its operational activities and
improve its operating efficiency. In January 1999, the Company signed a
Master Licensing Agreement with Warner Brothers Consumer Products Co.. and
obtained the right to utilize Warner Brothers' "Looney Tunes"TM character
images and names in the Shanghai and Hangzhou greater metropolitan areas.
This licensing agreement gives the Company exclusive rights with respect to
such images and names in the defined geographic regions for use in
connection with specified categories of products sold by the Company's
subsidiaries in those areas. The Company will introduce these "Looney
Tunes"TM products in the Shanghai and Hangzhou markets in the summer of
1999. In addition, the Company has negotiated a private offering for
additional equity financing having maximum proceeds of $2,500,000. That
offering will involve the issuance of a new class of convertible preferred
at a purchase price of $2.50 per share. During 1999, the Company received
a "term sheet" for this transaction, which has been approved by management.
The Company has been informed that the transaction can be closed by the end
of May 1999. See fund raising activities disclosed in Note 9 and Note 11.
Basis of Accounting
The consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America
which include the accounts of the Company and its subsidiary. All
significant inter-company accounts and transactions have been eliminated in
consolidation. The minority interests in the two Chinese joint ventures
has been reported as a separate line item on the consolidated balance
sheet. The consolidated financial statements are presented in U.S.
dollars.
Revenue Recognition
The Company recognizes revenue when the risk of loss for the product sold
passes to the customer which is generally when goods are shipped.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
Inventory Valuation
Inventory is stated at the lower of cost or market. Costs are determined
on a first-in and first-out basis.
Foreign Currency Translation and Transactions
The financial position and results of operations of the Company's foreign
subsidiary are determined using local currency as the functional currency.
Assets and liabilities of this subsidiary are translated at the prevailing
exchange rate in effect at each year end. Contributed capital accounts are
translated using the historical rate of exchange when capital is injected.
Income statement accounts are translated at the average rate of exchange
during the year. Translation adjustments arising from the use of different
exchange rates from period to period are included in the cumulative
translation adjustment account in shareholders' equity. Gains and losses
resulting from foreign currency transactions are included in operations.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is computed
primarily utilizing the straight-line method over the estimated useful
lives of the assets as follows:
<TABLE>
<CAPTION>
Estimated Useful
Life
(in years)
----------------
<S> <C>
Plant and building 20
Machinery and equipment 10
Computer, office equipment and furniture 5
Vehicles 5
</TABLE>
Maintenance, repairs and minor renewals are charged directly to expenses as
incurred. Additions and betterment to property and equipment are
capitalized. When assets are disposed of, the related cost and accumulated
depreciation thereon are removed from the accounts and any resulting gain
or loss is included in the statement of income.
VAT Refund Receivable
The Company's subsidiary in China, GFP, is subject to value added tax (VAT)
imposed by the Chinese government on its domestic sales. The output VAT is
17% for sales of chocolate milk and 13% for sales of fresh milk. The input
VAT is paid when GFP purchases raw materials. According to the relevant
government regulation, the input VAT can be offset against output VAT. The
VAT payable account balance is the amount of output VAT reduced by the
amount of input VAT on a cumulative basis. VAT refund receivable is the
excess of input VAT over output VAT.
Construction in Progress
Construction in progress represents another plant in Beijing, China. The
construction in progress is stated at cost. All direct costs relating to
the construction of the plant are capitalized as long-term assets.
Proprietary Technology
The proprietary technology is composed mainly of patents and recipes for
various milk products and other drinking products. The proprietary
technology is being amortized over a period of ten years starting from
April 1995, when GFP began its commercial production in China.
Goodwill
Goodwill represents the excess of acquisition cost over the net assets
acquired in business combinations in 1998. Goodwill is amortized on a
straight line basis over five years.
Periodically, the Company reviews the recoverability of goodwill as
required by SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of." The measurement of
possible impairment is based primarily on the undiscounted future operating
cash flows without interest charges of the acquired entity over the remaining
amortization period. Based upon its most recent analysis, the Company
believes that no material impairment exists at December 31, 1998. The
assessed recoverability of goodwill will be impacted if estimated future
operating cash flows are not achieved. The amortization expense for the
year ended December 31, 1998 was $26,645.
Start Up Costs
Start up costs represents costs incurred in setting up the GFP headquarters
and its plants in order to operate on a commercial basis. Such costs are
capitalized and amortized over a period of five years from the date of
commencement of business.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of financial
statements and the reported amounts of revenue and expenses during the
reporting period. Among the more significant estimates included in these
financial statements are the estimated allowance for doubtful accounts
receivable and the deferred income tax asset allowance. Actual results
could differ from those estimates.
Accounts Receivable and Concentration of Credit Risk
The Company's main business are manufacturing and distribution. During the
normal course of business, the Company extends unsecured credit to its
customers located in Shanghai area. The Company reviews its accounts
receivable on a regular basis to determine if the bad debt allowance is
adequate at each year end. The Company maintains its cash accounts in high
quality financial institution.
Fair Value of Financial Instruments
The carrying amount of cash, trade accounts receivable, notes receivable,
trade accounts payable, accrued payable and notes payable are reasonable
estimates of their fair value because of the short maturity of these items.
The carrying amounts of the Company's credit facilities approximate fair value
because the interest rates on these instruments are subject to change with
market interest rates.
Income Taxes
The Company accounts for income taxes using the liability method, which
requires an entity to recognize deferred tax liabilities and assets.
Deferred income taxes are recognized based on the differences between the
tax bases of assets and liabilities and their reported amounts in the
financial statements which will result in taxable or deductible amounts in
future years. Further, the effects of enacted tax laws or rate changes are
included as part of deferred tax expenses or benefits in the period that
covers the enactment date. A valuation allowance is recognized if it is
more likely than not that some portion, or all of, a deferred tax asset
will not be realized.
Accounting for the Impairment of Long Lived Assets and of the long-lived
Assets to Be Disposed of
Statement of the Financial Accounting Standards No. 121 "Accounting for the
Impairment of Long-Lived Assets and for the Long-Lived Assets to be
Disposed Of" (SFAS 121) establishes new guidelines regarding when
impairment losses on long-lived assets, which include plant and equipment,
and certain identifiable intangible assets, should be recognized and how
impairment losses should be measured. The Company has adopted this
accounting standard and its effects on the financial position and the
results of operations were immaterial.
Earnings (Loss) Per Share
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"). The
statement replaces the calculation of primary and fully diluted earnings
(loss) per share with basic and diluted earnings (loss) per share. Basic
earnings (loss) per share includes no dilution and is computed by dividing
income (loss) available to common shareholders by the weighted average
number of shares outstanding during the period. Diluted earnings (loss)
per share reflects the potential dilution of securities that could share in
the earnings of an entity, similar to fully diluted earnings (loss) per
share. All earnings (loss) per share amounts have been restated to conform
to the requirements of SFAS 128. For the years ended December 31, 1997 and
1998, total stock options and stock warrants of 4,029,553 and 4,945,867 were
not included in the computation of diluted earnings per share owing to their
antidilutive effect.
Stock-based Compensation
The Company has adopted Statement of Financial Accounting Standards No.
123, "Accounting for Stock-based Compensation" (SFAS No. 123). The Company
adopts the intrinsic value method of accounting for employee stock options
and disclose the pro forma impact on net income and earnings per share as
if the fair value based method had been applied. For equity instruments,
including stock options issued to non-employee, including directors, the
fair value of the equity instruments or the fair value of the consideration
received, whichever is more readily determinable, is used to determine the
value of services or goods received and the corresponding charge to
operations.
Reclassifications
Certain reclassifications have been made to the prior year consolidated
financial statements to conform with the 1998 presentation.
Comprehensive Income (Loss)
During the year ended January 1, 1999 the Company adopted Statement of
Financial Accounting Standard No. 130, "Reporting Comprehensive Income,"
("SFAS 130") issued by the FASB is effective for financial statements with
fiscal years beginning after December 15, 1997. SFAS 130 establishes
standards for reporting and presentation of comprehensive income (loss) and
its components in a full set of general-purpose financial statements. The
Company has chosen to report comprehensive income (loss) in the statements
of operations. Comprehensive income (loss) is comprised of net income and
all changes to stockholders' equity except those due to investments by
owners and distributions to owners. Adoption of SFAS 130 did not have a
material impact on the Company's financial position or results of
operations.
New Accounting Standards Not Yet Adopted
Statement of Financial Accounting Standards No. 132, "Employer's
Disclosures about Pensions and Other Postretirement Benefits" (SFAS No.
132) is effective for financial statements with fiscal years ending
beginning after December 15, 1997; earlier application is permitted. The
new standard revises employers' disclosures about pension and other
postretirement benefit plans but does not change the measurement or
recognition of those plans. SFAS No. 132 standardizes the disclosure
requirements for pensions and other postretirement benefits to the extent
practicable, requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate financial
analysis, and eliminates certain disclosures previously required when no
longer useful. The Company does not expect the adoption of SFAS No. 132 to
have a material effect, if any, on its financial position or results of
operations.
Statement of Financial Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS No. 133) requires companies to
recognize all derivatives contracts as either assets or liabilities in the
balance sheet and to measure them at fair value. If certain conditions are
met, a derivative may be specifically designated as a hedge, the objective
of which is to match the timing of gain or loss recognition on the hedging
derivative with the recognition of (i) the changes in the fair value of the
hedged asset or liability that are attributable to the hedged risk or (ii)
the earnings effect of the hedged forecasted transaction. For a derivative
not designated as a hedging instrument, the gain or loss is recognized in
income in the period of change. SFAS No. 133 is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999.
Historically, the Company has not entered into derivatives contracts either
to hedge existing risks or for speculative purposes. Accordingly, the
Company does not expect adoption of the new standard on January 1, 2000 to
affect its financial statements.
The Accounting Standards Executive Committee issued Statement of Position
("SOP") 98-5 "Reporting on the Costs of Start-Up Activities" which will be
effective for financial statements for fiscal years after December 15, 1998
and requires that costs of start-up activities, including organization
costs, be expensed as incurred. In accordance with SOP 98-5, the Company
expects to write off start up costs in its subsidiaries in the first
quarter of 1999, the effect will be $248,732.
Note 1. Inventory
Inventory consists of:
<TABLE>
<CAPTION>
December 31,
-------------------
1997 1998
-------------------
<S> <C> <C>
Raw materials $69,678 $554,069
Finished goods 7,869 314,169
-------------------
Total $77,547 $868,238
===================
</TABLE>
Note 2. Property, Plant and Equipment
Property, plant and equipment consists of:
<TABLE>
<CAPTION>
December 31,
--------------------------
1997 1998
--------------------------
<S> <C> <C>
Plant and buildings $ 495,661 $ 1,774,021
Machinery 1,306,070 5,203,059
Computer, office equipment and furniture 172,100 494,835
Vehicles 236,567 307,155
--------------------------
2,210,398 7,779,071
Accumulated depreciation and amortization (518,257) (1,972,303)
--------------------------
Property, plant and equipment, net $1,692,141 $5,806,767
==========================
</TABLE>
Note 3. Bank Loans
The balances of the short-term bank loans in Meilijian consists of:
<TABLE>
<CAPTION>
December 31,
1998
------------
<S> <C>
Bank of China $1,244,157
Construction Bank of China 181,188
Industry and Commerce Bank of China -
----------
Total $1,425,345
==========
</TABLE>
The Company obtained revolving lines of credit from major state-owed
commercial banks in China for working capital purposes. In the aggregate,
these lines of credit allowed the Company to borrow money up to RMB13 million
(approximately US$1,570,000 as of December 31, 1998). These lines of
credit have terms ranging from three months to seven months with a floating
interest rate at December 31, 1998 ranging from 7.5% to 10% per annum subject
to change based on notice from the central bank, People's Bank of China.
In China, these lines of credit are generally renewable as long as
Meilijian pays all interest on a timely basis.
All these lines of credit were guaranteed by Hangzhou AOYIPOLLEN
Pharmaceutical Co. Ltd., a related party to Hangzhou United Dairy Company.
At December 31, 1998, all the lines of credits from Bank of China were
collateralized by substantially all the fixed assets of Hangzhou Meilijian,
in addition to the guarantee provided by Hangzhou AOYIPOLLEN Pharmaceutical
Co., Ltd.
The balances of the bank loans in GFP consists of:
<TABLE>
<CAPTION>
December 31,
-------------------------
1997 1998
-------------------------
<S> <C> <C>
Construction Bank of China - short term $ 905,819 $ 881,781
Development Bank of China - short term 120,776 265,742
Development Bank of China - long term portion 205,319
-------------------------
Total $1,231,914 $1,147,523
=========================
</TABLE>
The repayment of these two loans was delayed as of December 31, 1997. In
June 1998, GFP entered into an agreement with the above two banks,
respectively, regarding the repayment of these two loans. The agreement
specifies that GFP would make payment of approximately $50,000 quarterly
to each bank beginning September 1998 and that all the remaining balance
due to each bank would be paid off as of December 31, 1999. As of December
31, 1998, GFP's repayment is current.
Note 4. Long-Term Debt
During the process of acquiring from American Flavor China, Inc. the 52% of
equity interest in and to Meilijian, the Company issued a promissory note
to assume the American Flavor's debt owed to a supplier. The face value of
that unsecured note was $282,637.53 at an interest rate of 10.5% per annum.
The balance at December 31, 1998 was $250,845. The note has a monthly
installment payment of $7,250 with 23 payments and a balloon payment of
$159,862.38 on July 15, 2000. The minimum cash payments are $87,000 in 1999
and 203,462 in 2000. The note has a late charge article that the Company
will be charged 3% of overdue principal and interest if the note holder does
not receive the payment within 15 days of the monthly due dates.
Long Term Related Party Loan
Related party loan consisted of:
<TABLE>
<CAPTION>
December 31, 1998
----
<S> <C>
Shareholder loans-Fixed assets $560,080
Shareholder loans-Trademark 36,238
Shareholder loans - Interest accumulated 81,265
--------
Long-term related party loans $677,583
========
</TABLE>
In the course of setting up Hangzhou Meilijian, the Chinese investor,
Hangzhou United Dairy Co. (HDC), contributed fixed assets with a value
in excess of its required capital contribution amount. Based on an agreement
signed by the Chinese and American investors, the excess portion was treated
as a fixed asset loan from HDC at an interest 8% per annum.
On January 1, 1994, HDC provided the Company with the use of its trademark,
which was valued at RMB500,000 (approximately US$60,245). The Company
recorded this trademark value as a part of deferred assets and a
shareholder loan. The Company recorded amortization of RMB50,000
(approximately US$6,025) per year for trademark and paid cash of RMB50,000
to HDC per year against the shareholder loan.
Note 5. Related Party Transactions
a) Related Party Loans from China National Green Food Company
During the organization period of GFP, China National Green Food
Corporation, one of the three partners of GFP, wired RMB6,600,000
(approximate US$795,353) in the form of shareholder's loan to GFP to
finance its activities. In April, 1996, China National Green Food
Corporation wired another RMB2,000,000 (approximately US$241,016) in the
form of shareholder's loan to GFP. All these shareholder's loans have been
converted to paid-in capital to satisfy the registered capital requirements
contained in the Article of Association of GFP. To date, a total of
interest payable of RMB882,721 (approximately US$106,375) has been
converted into paid-in capital as part of the registered capital under the
name of China National Green Food Corporation.
In April and November 1996, China National Green Food Corporation loaned
RMB350,000 (approximately US$42,178) and RMB200,000 (approximately
US$24,101), respectively, to GFP to finance its working capital. An
interest rate of 12.4% per annum was applied to determine relevant interest
accrual. These two loans were being paid off in September and October,
1997, respectively.
c) Related Party Loans from Shareholders of the Company
In January and March, 1997, one shareholder and three shareholders together
provided loan of US$200,000 and US$1,315,000, respectively, to satisfy
registered capital needs of GFP by the end of March, 1997. These two loans
were paid off during May and June 1997 by using the proceeds of various
stock offerings.
d) Related party purchase
Meilijian purchased from ranches owned by Hangzhou United Dairy Company raw
milk of US$2,933,221 and US$1,480,528 for the period ended December 31,
1997 and 1998.
Note 6. Income Taxes
For federal income tax purpose, income tax expense in 1996 for CPEL was
passed through to the individual partners. From January 1 to March 5,
1997, CPEL did not have any operating activities.
The Company's subsidiaries, GFP and HMDP, are operating in China and
subject to the Chinese Foreign Investment Enterprise Income Tax at the rate
of 33%, of which 30% is attributed to central government and 3% to
provincial government. In line with relevant income tax law, a foreign
investment enterprise with an operating period of more than ten years is
entitled to have a 100% income tax credit for two years and a 50% income
tax credit for three years starting from the first profit-making year and
the net operating losses can be carried forward for five years. The
following tables reflect the consolidated income tax provision for the
Company.
<TABLE>
<CAPTION>
Years ended December 31,
------------------------
1997 1998
------------------------
<S> <C> <C>
Current
Federal $ - $ -
Foreign - -
---------------------
$ - $ -
=====================
</TABLE>
The components of the net deferred tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
December 31,
----------------------------
1997 1998
----------------------------
<S> <C> <C>
The U.S. Company
Deferred tax assets: $ 298,161 $ 902,832
Net operating loss carryforwards (298,161) (902,832)
----------------------------
Valuation allowance 0 0
----------------------------
Foreign (China)
Deferred tax assets: 0 12,304
Inventory allowance 6,780 281,259
Bad debt allowance 1,303,234 1,770,201
----------------------------
Net operating loss carryforwards (1,310,014) (2,063,764)
----------------------------
Valuation allowance 0 0
----------------------------
$ 0 $
============================
</TABLE>
Management is unable to determine whether the realization of the net deferred
tax asset is more likely than not, therefore, a 100% valuation allowance has
been established.
The difference between the effective tax rate and that computed under the
federal statutory rate is as follows:
<TABLE>
<CAPTION>
December 31,
-------------------
1997 1998
-------------------
<S> <C> <C>
Federal statutory rate (34.0)% (34.0)%
Utilization of net operating loss 34.0% 34.0%
-----------------
0.0% 0.0%
=================
</TABLE>
At December 31, 1998, the Company had net operating loss carryforwards of
approximately $2,600,000 with expirations through 2019 in the U.S. and
approximately $5,400,000 with expirations through 2004 in China.
Note 7. Commitments and Contingencies
Commitments
The Company leases office space at its corporate offices in Florida under
operating leases expiring in February, 2004.
The Company's subsidiary in China, GFP, has leased the plant land and
office building in Shanghai under operating leases expiring at June 30,
2043 and a month to month tenancy, respectively.
The Company's subsidiary in China, Hangzhou Meilijian Dairy Company, has
leased the plant land from the City of Hangzhou under operating leases
expiring at December 31, 2013.
Future minimum rental payments required under operating leases that have an
initial or a remaining lease term in excess of one year at December 31,
1998 are as follows:
<TABLE>
<CAPTION>
Year ending December 31, Amount
- ------------------------ ----------
<C> <C>
1999 $ 95,175
2000 76,611
2001 76,611
2002 76,611
2003 76,611
Thereafter 1,164,730
----------
$1,566,349
==========
</TABLE>
Rental expense for the years ended December 31, 1997 and 1998 was
approximately $82,728 and $112,396, respectively.
Note 8. Reorganizations and Recapitalization
(a) In February, 1997, the Company reorganized its members of the founding
group. As a result, the total founders increased from one entity to three
individuals and two entities. Consequently, 788,000 shares of common stock
and 500,000 shares of preferred stock with a par value of $0.001 per share
were issued to the newly joined founders.
Each share of Series A preferred stock entitles its holder to receive
dividends at the same rate paid to common shareholders. Unless the Company
pays or declares dividends with respect to common shares, the Company has
no obligation to declare or pay dividends with respect to Series A
preferred stock. Each share of Series A preferred stock is convertible
into one share of common stock, as adjusted, for such things as stock
split, stock dividends and other similar dilutive occurrence. At any time
subsequent to December 31, 1997 the holder of each share of Series A
preferred stock is allowed to convert all or part of the Series A preferred
shares into corresponding shares of common stock.
(b) On March 5, 1997, the Company issued 1,040,000 shares of common stock
in exchange for a 100% equity of China Peregrine Enterprises, Limited
(CPEL). CPEL was, a Texas limited partnership, set up to manage its
interest in the China operation conducted by a Chinese joint venture known
as Green Food Peregrine Children's Food Co. Ltd. (GFP). As the two major
partners of CPEL were members of the founding group of the reorganized
Company, this reverse acquisition was reported as a related party
transaction and accounted for in a manner similar to a pooling of interest.
The following table presents all outstanding shares of common stock and
Series A preferred stock before the reverse acquisition transaction closed:
<TABLE>
<CAPTION>
Series A
Preferred Stock Common Stock Additional
----------------- ------------------- Paid-in
Shares Amount Shares Amount Capital Total
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Beginning balance at January 1, 1997 - $ - 472,000 $ 472 $ - $ 472
Issuance of Series A Preferred Stock 500,000 500 - - - 500
Issuance of common stock to new founders - - 788,000 788 - 788
Issuance of common stock to acquire Manor
Products Corp. - - 25,000 25 - 25
----------------------------------------------------------------
Total shareholders' equity 500,000 $500 1,285,000 $1,285 $ - $1,785
================================================================
</TABLE>
Note 9. New Issuance of Common Stock and Preferred Stock
(a) On March 15, 1997, the Company issued 1,260,000 shares of Series B
preferred stock with a stated value $1.00 per share to three shareholders
after they assumed the Company's obligation to repay approximately
$1,260,000 for an outstanding line of credit owed by CPEL to a Tennessee-
based financial institution. The outstanding line of credit was incurred
during 1995 and 1996 in connection with operation of CPEL and was paid off
in full in October, 1997.
The shares of Series B preferred stock have three features. First,
each share of Series B preferred stock is convertible into one share of
common stock, as adjusted, for such things as stock split, stock dividends
and other similar dilutive occurrence. At any time subsequent to December
31, 1998 the holder of each share of Series B preferred stock, is allowed
to convert all of part of the Series B preferred shares into corresponding
shares of common stock. Second, each share of Series B preferred stock
entitles its holder to accumulate dividends at 9% per annum even if the
dividends are payable only upon dissolution and liquidation of the Company
and redemption called by the Company. However, each share of Series B
preferred stock entitles its holder to receive dividends at the same rate
paid to common shareholders if the Company declares or pays dividends to
common shareholders. Third, the shares of Series B preferred stock are
redeemable at $1.00 per share totaling $1,260,000 called by the Company any
time after December 31, 1998.
(b) On May 31, 1997, the Company closed a Rule 504, Regulation D limited
public offering of 975,000 units (each unit consisting of one share of
common stock and a warrant for one share of common stock) at $1.00 per
unit. The net proceeds of this offering amounted to $975,000. These funds
were utilized to repay shareholders' loans to the Company, the proceeds of
which were utilized to satisfy the registered capital requirements of GFP.
(c) Subsequent to the Rule 504, Regulation D offering in 1997, the Company
conducted a Section 4(2) private placement to issue 1,520,000 shares of
common stock at $1.00 per share. The investor group involved in this Rule
144 offering was made up largely of the same investor group involved with the
Rule 504, Regulation D offering. The total proceeds from this private
placement amounted to $1,520,000.
(d) During 1997, the Company incurred consulting, legal and accounting
expenses relating to these two fund raising activities, and other
directors' fees and travel expenses. In order for the Company to pay these
expenses and discharge the obligation to pay the legal expenses incurred in
1995 and 1996 by CPEL, it issued a total of 469,000 shares of common stock
at $1.00 per share. These non-cash transactions are presented as follows:
<TABLE>
<CAPTION>
Common Stock Additional
------------------ Paid-in
Date Shares Amount Capital Total
----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Assumption of CPEL's accrued legal fees 03/15/97 200,000 $200 $199,800 $200,000
Issuance of stock for legal fees relating to
fund raising 03/30/97 15,000 15 14,985 15,000
Issuance of stock for stock promotion service 04/15/97 100,000 100 99,900 100,000
Issuance of stock for stock promotion service 05/01/97 35,000 35 34,965 35,000
Issuance of stock for stock promotion service 06/01/97 10,000 10 9,990 10,000
Issuance of stock for consulting service 07/01/97 24,000 24 23,976 24,000
Issuance of stock for accounting service 10/01/97 15,000 15 14,985 15,000
Issuance of stock for consulting service 10/15/97 25,000 25 24,975 25,000
Issuance of stock for a directors' fee 11/01/97 25,000 25 24,975 25,000
Issuance of stock for travel expense 11/17/97 20,000 20 19,980 20,000
----------------------------------------------------------
469,000 $469 $468,531 $469,000
==========================================================
</TABLE>
e) On January 15, 1998, the Company issued 50,000 shares of common stock
at $1.00 per share in exchange for stock promotion services provided by a
capital service company.
f) On February 2, 1998, the Company issued 5,272 shares of common stock at
$2.25 per share to an individual in exchange for his services in connection
with the furnishing of the Company's corporate office.
g) On May 2, 1998, the Company issued 557,000 units (each unit composed of
one share of common stock and one warrant to purchase one share of common
stock) at a price of $2.50 per unit, pursuant to a private offering in
accordance with the exemption provided in Rule 506, Regulation D. The net
proceeds of this offering were $1,387,500. Among the 557,000 shares
issued, 2,000 shares valued at $5,000 were issued in exchange for accounting
service. The holders of such warrants are entitled to purchase, from time to
time, up to 557,000 shares of common stock, par value $0.001 per share, at an
exercise price of $1.00 per share, at any time after June 30, 1998 and through
and including June 30, 2003.
h) On February 19, 1998, the Company issued 120,000 shares of common stock
at a price of $1.00 per share to Amer-China Partners, Limited (ACPL)
pursuant to a signed agreement dated October 1, 1997 to acquire ACPL's
entire interest and right (2.4%) in and to the Green Food Peregrine
Children's Food Co. Ltd.
i) On July 31, 1998, the Company issued 1,531,685 shares of common stock
to American Flavor China, Inc. to acquire its 52% of equity interest in and
to Hangzhou Meilijian Dairy Products Co. Ltd. at $1.00 per share.
This transaction was accounted for a purchase and the operation
results of Meilijian are included as of the date of acquisition.
The unaudited pro forma results of operations presented below reflect
the Company's operations as though the acquisition had taken place at the
beginning of each period presented. The pro froma results have been
prepared for comparative purposes only, and are not necessarily indicative
of what the actual result of operations would have been had such
acquisitions occurred at the beginning of the periods presented, or what
results of operations will be in the future.
<TABLE>
<CAPTION>
Years ended December 31,
---------------------------
1997 1998
---- ----
<S> <C> <C>
Revenues $ 6,874,882 $ 5,702,139
Operating income (loss) (2,548,983) (2,637,030)
Net loss (2,254,484) (3,020,240)
Basic loss per share (.45) (0.45)
Diluted loss per share (.45) (0.41)
Basic average number of common shares
outstanding 3,213,512 7,345,152
Diluted average number of common shares
outstanding 5,213,512 7,345,152
</TABLE>
j) In October 1998, the Board of Directors of the Company decided to
reduce the exercise price of warrants issued during the Rule 504,
Regulation D offering in 1997 from $5.00 to $1.00. Subsequently, certain
holders of 265,000 warrants exercised their warrants at $1.00 per share.
The Company issued 165,000 shares of common stock in December and recorded
$100,000 of stock subscribed as of December 31, 1998, which was fully
collected in February 1999.
k) On November 19, 1998 the Company conducted a Rule 504 Regulation D
offering to sell Series C preferred stock to two institutional investors
in order for the Company to raise funds to increase its equity capital
interest in GFP in 1999. One institutional investor purchased on November
19, 1998, 83,334 shares of Series C preferred stock at $3.00 per share with
83,334 warrants attached at an exercise price of $1.00 per share. The other
institutional investor purchased on December 29, 1998 another 50,000 shares
of Series C preferred stock at $3.00 per share with 450,000 warrants
attached at an exercise price of $1.00 per share and the relevant proceeds
were received on January 4, 1999. The total net proceeds of the Rule 504
offering was $385,000, net of offering expenses of approximately $15,000.
Each share of Series C preferred stock has the following features: 1)
stated value of $3 per share, 2) dividend accrued at 8% per annum and
payable in cash of common stock at the Company's option and upon
conversion, at the option of the holder, or redemption, 3) no voting right,
and 4) convertible into common stock.
The conversion feature is specified in the offering memorandum as follows:
the number of shares of common stock issuable upon conversion of each share
of Series C preferred stock shall equal (i) the sum of (A) the stated value
per share and (B) at the holder's election accrued and unpaid dividends on
such share, divided by (ii) the conversion price. The conversion price for
each share of Series C convertible preferred stock in effect on any
conversion date shall be the lesser of (a) 75% of the average per share
market price on the date of the applicable holder conversion notice or (b)
$3.00 per share, provided that, during the period from November 1, 1998
through February 29, 1999, the conversion price shall not be less than
$1.00 for each share of underlying common stock (the price floor), which
price floor shall be applicable to the aggregate number of issued and
outstanding Series C preferred stock held by any one holder, as follows:
100% during November 1998; 75% during December 1998; 50% during January
1999; 25% during February 1999; and no applicable price floor thereafter.
On November 19, 1998, the Company recognized a deemed dividend of $83,334
because of the beneficial built in conversion feature which allows each share
of preferred stock to be converted into each share of common stock at 75% of
market price at issuing date. As a result of implementing the accrued
dividend policy for the Series C preferred stock, the Company recognized
$2,217 of dividends payable to the 83,334 shares of Series C preferred
stock.
Note 10. Stock Warrants and Options
In 1997, the Company issued warrants for 975,000 shares of common stock as
part of the units sold in the Rule 504, Regulation D limited public offering.
These warrants may be exercised at any time after May 31, 1998, and from
time to time thereafter through and including March 31, 1999.
During 1997, the Company signed a total of four stock options agreements
with certain shareholders and non-employee directors. These warrants and
four stock option agreements are summarized as follows:
<TABLE>
<CAPTION>
Warrants/
Grant Options Exercise Vesting Expiration
Date Granted Price Period Date
<S> <C> <C> <C> <C> <C>
Warrants issued in Rule 504
Regulation D offering 5/31/97 $ 975,000 $1.00 12 months 3/31/99
Warrants issued in Rule 506,
Regulation D offering 6/2/98 557,000 1.00 None 6/30/2003
Warrants issued with Series C
Preferred Stock 11/19/98 83,334 1.00 None 5/10/99
Warrants exercised 12/15/98 (165,000) 1.00 None -
Warrants issued with Series C
Preferred Stock 12/29/98 450,000 1.00 None 4/30/99
----------
Total outstanding warrants 1,900,334
Agreement One 4/29/97 $1,005,533 $1.00 None 4/28/2002
Agreement Two 4/30/97 2,000,000 1.00 None 4/29/2002
Agreement Three 10/1/97 25,000 1.00 None 9/30/2002
Agreement Four 10/1/97 15,000 1.00 None 9/30/2002
----------
Total options outstanding at
December 31, 1998 3,045,533
</TABLE>
The Company adopted FAS 123 to account for its stock warrants and options
granted during 1997 and 1998. Accordingly, a compensation cost of $205,979
has been recognized for the options granted to non-employee directors
during 1997.
A summary of the status of the Company's stock options and warrants as of
December 31, 1997 and 1998 with changes during the year then ended are
presented below:
<TABLE>
<CAPTION>
Weighted Average
Shares Exercise Price
------------------------------
<S> <C> <C>
Outstanding at January 1, 1997 - -
Total Granted 4,020,553 $1.00
------------------------
Total warrants and options outstanding and exercisable
at December 31, 1997 4,020,553 $1.00
Warrants exercised in 1998 (165,000)
Warrants granted in 1998 1,090,334
------------------------
Total warrants and options outstanding and exercisable at
December 31, 1998 4,945,867 $1.00
========================
Weighted average fair value of options and warrants
granted during 1998 4,945,867 $1.00
========================
</TABLE>
The following table summarizes information about stock options and warrants
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
Warrants/Options Outstanding Options Exercisable
---------------------------------------- ------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Number Contractual Exercise Number Exercise
Exercise Price Outstanding Life Price Exercisable Price
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$1.00 3,045,533 3.34 Yrs. $1.00 3,045,533 $1.00
$1.00 1,900,334 .29 Yrs. $1.00 1,900,334 $1.00
--------- ---------
4,945,867 2.21 $1.00 4,945,867 $1.00
========= =========
</TABLE>
Note 11. Subsequent Events
a) New issuance of Convertible Preferred Stock in 1999
On March 9, 1999, the Company conducted a Rule 506 Regulation D offering to
sell Convertible Series D preferred stock to three institutional investors
in order for the Company to raise working capital for its operations in
1999. On that date, the Company sold 50,000 units (each unit composed of
one share of Series D Convertible Preferred Stock and one warrant to
purchase shares of the Company's common stock at $2.96 per share expiring
at March 9, 2002) at a price of $10.00 per unit.
Three institutional investors purchased 16,250 shares, 16,250 shares, and
17,500 shares of Series D convertible preferred stock at $10.00 per unit.
Each share of Series D preferred stock entitles the holder to receive or
accrue dividends at the rate of 6% simple interest per annum, which is
payable in cash or common stock quarterly at the Company's option and to
convert into common stock. The payment of dividends shall be made first to
the Series D Convertible preferred stockholders before dividends or other
distributions are made on any common stock, Series A Preferred Stock,
Series B Preferred Stock or Series C Preferred Stock. The Series D
Preferred Stock has no voting rights.
The number of shares of common stock issuable upon conversion of each share
of Series D Preferred Stock shall equal (i) the sum of (A) the Stated Value
per share and (B) at the holder's election accrued and unpaid dividends on
such share, divided by (ii) the conversion price. The conversion price
shall be equal to the lessor of: (i) 100% of the average of the closing bid
price of the Company's common stock for the trading day immediately
preceding the date of issuance of the shares of Series D Preferred Stock to
the holders; or (ii) 80% of the average of the three lowest closing bid
prices for the 22 trading days immediately preceding the conversion of the
respective shares of Series D Preferred Stock.
The aggregate gross proceeds from selling these 50,000 units was $500,000,
which the Company received on March 10, 1999, net of expense of $30,000.
In addition, the three institutional investors have committed to invest
additional $500,000, which will occur upon the completion of certain 1933
Act registration events as spelled out in the Subscription Agreement. The
Company anticipates to complete filing an SB-2 registration statement on or
about April 16, 1999. The finder fees for this fund raising exercise were
paid in the form of 3,5000 shares of Series D Convertible preferred stock
and 50,000 warrants to purchase the Company's common stock at exercise
price of $2.96 expiring at March 9, 2002.
b) Additional Financing
During the months of March and April 1999, the Company negotiated a private
offering for additional equity financing having maximum proceeds of
$2,500,000. That offering will involve the issuance of a new class of
convertible preferred at a purchase price of $2.50 per share. On April 9,
1999, the Company received a "term sheet" for this transaction, which has
been approved by management. The Company has been informed that the
attorneys for the investors' agent are in the process of drafting the
required documentation and that the transaction can be closed by the end of
May 1999.
CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
The Company has not had any changes in or disagreements with its independent
accountants.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Amended and Restated Articles of Incorporation and By-Laws
contain provisions eliminating the personal liability of a director to the
Issuer and its stockholders for certain breaches of his or her fiduciary
duty of care as a director. This provision does not, however, eliminate or
limit the personal liability of a director (i) for any breach of such
director's duty of loyalty to the Company or its stockholders, (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Delaware statutory provisions making
directors personally liable, under a negligence standard, for unlawful
dividends or unlawful stock repurchases or redemptions, or (iv) for any
transaction from which the director derived an improper personal benefit.
This provision offers persons who serve on the Board of Directors of the
Company protection against awards of monetary damages resulting from
breaches of their duty of care (except as indicated above), including
grossly negligent business decisions made in connection with takeover
proposals for the Company. As a result of this provision, the ability of
the Company or a stockholder thereof to successfully prosecute an action
against a director for a breach of his duty of care has been limited.
However, the provision does not affect the availability of equitable
remedies such as an injunction or rescission based upon a director's breach
of his duty of care. The Securities and Exchange Commission (the
"Commission") has taken the position that the provision will have no effect
on claims arising under the federal securities laws.
Item 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The Company has, pursuant to the Convertible Preferred Stock Purchase
Agreement, agreed to pay all expenses of this Offering, other than fees,
commissions, discounts and expenses of any underwriters engaged by the
Selling Shareholders. The estimated expenses of this Offering are:
<TABLE>
<S> <C>
Registration Fees $ 1,800.00
Attorney's Fees 20,000.00
EDGAR Services 3,000.00
----------
TOTAL $24,800.00
</TABLE>
<PAGE> 59
Item 26. RECENT SALES OF UNREGISTERED SECURITIES
FISCAL YEAR 1997
1997 Recapitalization
- ---------------------
Prior to February 1997, the Company (then known as Shakespeare Holding,
Inc.) was owned by Tamarind Management, Ltd., which held 472,000 shares of
Shakespeare's common stock as the original "founder." Shakespeare did no
business and was not an operating entity. In February 1997, however, the
Company underwent a "reorganization" by increasing the members of its
founding group to include two of the major participants in the China
Peregrine Enterprises, Limited (CPEL), the corporate General Partner of the
CPEL limited partnership, and a financial consultant. As a result, the
total founders increased from one entity to three individuals and two
entities. Consequently, 788,000 shares of common stock and 500,000 shares of
preferred stock at par value of $0.001 per share were issued to the newly
joined founders, pursuant to the exemption from Section 5 registration
provided by Section 4(2) of the Securities Act of 1933 (the Act). This
"reorganization" resulted from and was part of an overall plan of the new
"founders" to utilize the Company to purchase the assets of CPEL, and
operating entity with business interests in the People's Republic of China.
Merger with Shell
- -----------------
On February 28, 1997, the Company issued 25,000 shares of common stock in
exchange for 100% of equity interest in Manor Products Corp. (Manor),
pursuant to the safe harbor provisions of Regulation D, Rule 504. Manor was
a Delaware company established on January 10, 1996 without any operating
activities or substantial assets. In early 1996, 80% of equity interest of
Manor was bought by Mr. Paul Downes, a principal of Tamarind Management,
Ltd., the initial founding entity of the Company. Manor had 331
shareholders and 20,000,000 shares of common stock authorized. As of
February 9, 1997, Manor had 4,090,448 shares outstanding. Pursuant to a
merger agreement, each one thousand shares of Manor were exchanged for one
share of common stock of the Company, with fractional share rounded up to
the nearest full share. The remaining shares of the 25,000 shares of common
stock issued by the Company at that time were issued to this principal
individually.
Purchase of China Peregrine Enterprises, Limited Assets
- -------------------------------------------------------
On March 5, 1997, the Company issued 1,040,000 shares of common stock in
exchange for the assets of China Peregrine Enterprises, Limited (CPEL),
pursuant to Section 4(2) of the Act. CPEL was a Texas limited partnership,
set up to manage its interest in China operation conducted by a Chinese
joint venture known as Green Food Peregrine Children's Food Co. Ltd. (GFP).
By this transaction, the Company assumed all of the rights and obligations
of CPEL in and to the GFP Chinese Joint Venture. With the completion of the
transaction, the Company became an operating entity.
Issuance of Preferred Stock in 1997 in Consideration
- ----------------------------------------------------
for Assumption of Debt
----------------------
As a condition to the Company's purchase of CPEL's assets, the Company
required that all non joint venture obligations of CPEL be removed from
CPEL's books. Accordingly, three shareholders of the Company agreed to
assume such non joint venture debt, which consisted of a line of credit
obligation existing at the First Tennessee Bank. On March 15, 1997, the
Company issued 1,260,000 shares of Series B preferred stock, pursuant to
Section 4(2) of the Act, at stated value of $1.00 per share to three
shareholders in consideration of their assumption of the obligation
<PAGE> 60
to pay off approximately $1,260,000 of an outstanding line of credit owed by
CPEL to the Tennessee-based financial institution. The outstanding line of
credit was incurred by CPEL during 1995 and 1996 and paid off in 1997. Two
of the three shareholders to whom the Series B shares were issued were part
of the reorganized "founders" group, and the third was a limited partner in
CPEL
Satisfaction of registered Capital Requirements of Joint Venture
- ----------------------------------------------------------------
In the Spring of 1997, the payment of the last installment to satisfy the
capital contribution requirements of the GFP joint venture contract and
Articles of Association for that joint venture company became due. Payment
of this last installment was necessary to secure the continued involvement
of the Company in the GFP joint venture. Accordingly, by late March, 1997,
certain shareholders of the Company loaned sufficient funds to pay the
capital contribution installment then due. On May 1, 1997, the Company
closed a Rule 504, Regulation D, limited public offering of 975,000 units,
each unit consisting of one share of common stock and a warrant for one
share of common stock, at $1.00 per unit to raise money to repay these
loans, the proceeds of which had been utilized to pay the required capital
contribution. The net proceeds of this offering amounted to $975,000. All of
the proceeds of this limited public offering were earmarked for and utilized
to repay the shareholders loans. This 504 offering was combined with the
issuance of 25,000 shares by the Company in the above discussed merger
transaction with Manor Corp. for reporting and integration purposes. The
common stock underlying the warrants were not part of this 504 offering,
having an exercise date deferred for one year. This offering closed May 1,
1997.
Working Capital Funding
- -----------------------
Subsequent to Rule 504, Regulation D offering, the Company conducted a
separate private placement to issue 1,520,000 shares of its common stock at
$1.00 per share, commencing May 2, 1997, to raise funds for general working
capital. The total proceeds from this Section 4(2) private placement, which
closed May 31, 1997, amounted to $1,520,000. All subscribers were required
to execute subscription agreements and a questionnaire, which qualified them
as "accredited" investors. These purchasers were existing shareholders,
having participated in the 504 offering, or were associates of such 504
investors.
Issuance of Common Stock for Services
- -------------------------------------
During 1997, the Company incurred consulting, legal and accounting expenses
relating to these fund raising activities, and other directors' fees and
travel expenses. The Company issued a total of 469,000 shares of common
stock at $1.00 per share for these expenses, pursuant to Section 4(2). Each
recipient of these shares had worked closely with management of the Company
and had access to detailed corporate information.
<TABLE>
<CAPTION>
Description Date Shares Identity
- ----------- ---- ------ --------
<S> <C> <C> <C>
Assumption of CPEL's accrued legal fees 03/15/97 200,000 Peregrine Enterprises, Inc.
Issuance of stock for legal fees relating to fund raising 03/30/97 15,000 Roy D. Toulan, Jr.
Issuance of stock for stock promotion service 04/15/97 100,000 Continental Capital & Equity
Corporation
Issuance of stock for promotion services 05/01/97 35,000 Robert Mazzei (10,000);
Settondown Capital Int'l (10,000);
John Bannon (10,000);
Carol Bowes (5,000)
Issuance of stock for financial consultation services 06/01/97 10,000 Manchester Asset Management, Ltd.
Issuance of stock for consulting service 07/01/97 24,000 Susan Lurvey (12,000);
Dennison Chapman (12,000)
Issuance of stock for accounting service 10/01/97 15,000 Seymour Borislow (10,000)
Jeffrey Factor (5,000)
Issuance of stock for consulting service 10/15/97 25,000 David Dreyer
Issuance of stock for a directors' fee 11/01/97/9 25,000 Philip Pearce
Issuance of stock for travel expense 11/17/97 20,000 Tamarind Management Ltd.(15,000)
Dale Reese (5,000)
</TABLE>
Grant of Options
- ----------------
During 1997, the Company signed a total of four stock options agreements
with certain shareholders and non-employee directors for restricted shares
pursuant to Section 4(2) of the Act. These four stock option agreements are
summarized as follows:
<TABLE>
<CAPTION>
Granting Options Exercise Vesting Expiration
Date Granted Price Period Date
-------- ------- -------- ------- ----------
<S> <C> <C> <C> <C> <C>
Agreement One 4/29/97 1,005,533 $1.00 None 4/28/2002
Agreement Two 4/30/97 2,000,000 $1.00 None 4/29/2002
Agreement Three 10/1/97 25,000 $1.00 None 9/30/2002
Agreement Four 10/1/97 15,000 $1.00 None 9/30/2002
---------
Total options granted in 1997 3,045,533 -none exercised
=========
</TABLE>
FISCAL YEAR 1998
Issuance of Stock for Services Rendered
- ---------------------------------------
On January 15, 1998, the Company issued 50,000 shares of common stock at
$1.00 per share to Settondown International, Ltd. (Settondown) in exchange
for services by that capital service company, pursuant to Section 4(2) of
the Act. Settondown has consulted with the Company and its reorganization
"founders" from early 1997. Settondown's business involves consultation and
finder services for corporate financing on a private and limited basis.
On February 2, 1998, the Company issued 5,272 shares of common stock at
$2.25 per share to Kenneth G. Hanson in exchange for his services in
connection with the furnishing of the Company's corporate office, pursuant
to Section 4(2) of the Act. Mr. Hanson gained detailed knowledge of the
business and operations of the Company through his access to top level
management at the West Palm Beach corporate offices.
<PAGE> 62
Purchase of Amer-China Partners, Limited Interest in Joint Venture
- ------------------------------------------------------------------
On February 19, 1998, the Company issued 120,000 shares of common stock at a
price of $1.00 per share to Amer-China Partners, Limited (ACPL) pursuant to
a signed agreement dated October 1, 1997, to acquire ACPL's entire interest
and right (2.4%) in and to the Green Food Peregrine Children's Food Co.
Ltd., pursuant to Section 4(2) of the Act.
Working Capital Funding
- -----------------------
On May 2, 1998, the Company issued 557,000 units (each unit composed of one
share of common stock and one warrant to purchase one share of common stock)
at a price of $2.50 per unit, pursuant to a private offering in accordance
with the exemption provided in Regulation D, Rule 506. The net proceeds of
this offering were $1,387,500. Among the 557,000 shares issued, 2,000
shares were issued in exchange for accounting services. The holders of such
warrants are entitled to purchase, from time to time, up to 557,000 shares
of common stock, per value $0.001 per share, at an exercise price of $1.00
per share, at any time after June 30, 1998 and through and including June
30, 2003. The 557,000 shares were sold to 33 purchasers who, with one
exception, all qualified as "accredited" investors.
Purchase of American Flavors China, Inc. Interest in
- ----------------------------------------------------
Hangzhou Meilijian Joint Venture
--------------------------------
On June 19, 1998, the Company entered into a definitive agreement with
American Flavors China, Inc., a U.S.-based entity, to acquire its 52% equity
interest in Hangzhou Meilijian Dairy Products Co. Ltd. (Hangzhou Meilijian).
The Boards of Directors of both companies and of the joint venture have
approved the acquisition. Hangzhou Dairy Co. Ltd., a state-owned enterprise
in Zhejian Province of China, controls the remaining 48% of equity interest
in Hangzhou Meilijian. The aforesaid acquisition is subject to approval by
the local government authorities, which presently is pending. The terms of
the acquisition agreement, in part, resulted in the issue of 1,513,685
shares of the Company's common stock to American Flavors China, Inc.,
pursuant to Section 4(2) of the Act. The negotiations for this purchase
covered a time period at approximately one year. During that time, the
principals at American Flavors China, Inc. were given appropriate corporate
information concerning the business and operations of the Company.
Working Capital Funding
- -----------------------
Between December 17, 1998 and February 18, 1999, the Company issued 265,000
shares of its Common Stock to 15 holders of Warrants, issued May 1, 1997, as
a result of the exercise of those Warrants. All investors receiving these
shares were shareholders of the Company and are "accredited" investors. The
proceeds from this exercise aggregated $265,000.
Funding of Increase in Company's Equity Interest
- ------------------------------------------------
in Green Food Peregrine Joint Venture
-------------------------------------
On May 2, 1998, the Company approved and ratified an agreement between the
Company and China National Green Food for the increase of the Company's
equity interest in Green Food Peregrine from 70% (assuming the approval of
the Amer-China transfer) to 76.92%. This change in the ownership ratio will
take place upon the payment of an additional US $1,500,000 in registered
capital by the Company over an eighteen month period. Since Chinese
government regulations require approval of this change of the investment
ratio by the Ministry of Foreign Trade and Economic Cooperation, the Company
has agreed to an interim loan of US $500,000 to Green Food Peregrine, with
the conversion of that loan to registered capital upon obtaining the
required governmental approval. To fund this equity increase, commencing on
October 21, 1998, the Company initiated a limited public offering of its
Series C Convertible Preferred Stock, pursuant to Rule 504 of Regulation D.
On November 19, 1998, the Company issued 83,334 shares of its Series C
<PAGE> 63
Convertible Preferred Stock, plus a like number of Warrants, at a price of
$3.00 per share (including the Warrants) to Utah Resources International,
Inc., a sophisticated investor, resulting in proceeds of $250,000.
Subsequently, on January 2, 1999, this Rule 504 limited public offering was
amended to offer and issue 50,000 shares of like Series D Convertible
Preferred Stock, plus nine Warrants per share, at a price of $3.00 per share
(including Warrants), to Explorer Fund Management, Inc., a sophisticated
investor, resulting in proceeds of $150,000. The aggregate proceeds
received from this Rule 504 limited public offering, which closed January 4,
1999, amounted to $400,000. In addition, the exercise of all Warrants at
the exercise price would result in an additional $533,334 in proceeds
applied toward the Company's purchase of additional registered capital in
Green Food Peregrine.
Item 27. EXHIBITS
Except as noted, copies of the following documents are incorporated by
reference to exhibits bearing the same exhibit numbers filed with the
Company's Form 10K-SB, First Amendment, pursuant to item 601 of Regulation
S-B.
<TABLE>
<CAPTION>
SEC
Exhibit Reference
No. No. Title of Document Location
- ------- --------- ----------------- --------
<C> <C> <S>
1a 2 Asset Purchase Agreement
China Peregrine Enterprises, Limited
1b 2 Interim Agreement to Operate
China Peregrine Project
2a 3(i) Articles of Incorporation
2b 3(i) Amended Articles (name change)
3 3(ii) Restated Bylaws
China Peregrine Food Corporation
4a 4 Rights of Equity Holders
Common - Articles of Incorporation
4b 4 Preferred, Series A and B Designation
4c 4 Preferred, Series C Designation
4d 4 *Preferred, Series C Designation
5 10 Material Contracts
Green Food Joint Venture Contract
6 10 Material Contracts
Hangzhou Meilijian Joint
Venture Contract
<PAGE> 64
7a 10 Material Contracts
Asset Purchase Agreement
American Flavors China, Inc.
7b 10 First Amendment (1-28-98)
7c 10 Second Amendment (6-19-98)
8 21 Subsidiaries
Articles of Association
Green Food Peregrine
9 21 Subsidiaries
Articles of Association
Hangzhou Meilijian
10 27 **Financial Data Schedule
11 99 Hangzhou Meilijian Audited Financial
Statements, Years Ending
December 31,1996, 1997 & July 30, 1998
12 99 *Subscription Agreement, Series D
Convertible Preferred
13 99 *Warrant in Connection with
Series D Convertible Preferred
<FN>
<F*> * To be filed by amendment
<F**> ** Filed herewith
</FN>
</TABLE>
Item 28. UNDERTAKINGS
The Company hereby undertakes that it will:
(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the
information in the registration statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would
not exceed that which was registered) and any deviation from the
low or high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than a 20 percent change in
the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective
registration statement; and
(iii) Include any additional or change material information on the
plan of distribution.
<PAGE> 65
(2) For determining liability under the Securities Act, treat each post-
effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial
bona fide offering.
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
(4) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling
persons of the small business issuer pursuant to the foregoing provisions,
or otherwise, the small business issuer has been advised that in the opinion
of the Securities and Exchange Commission such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable.
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements of filing on Form SB-2 and authorized this
registration statement to be signed on its behalf by the undersigned, in
the city of North Palm Beach, Florida, April 16, 1999.
(Registrant) CHINA PEREGRINE FOOD CORPORATION
By: /s/ Charles Beech
_____________________________________________
Charles Beech, Chairman and Chief Executive Officer
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities
and on the dates stated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/S/ Charles Beech Chairman, CEO, Director April 16, 1999
/S/ Roy G. Warren President, Director April 16, 1999
/S/ Susan Lurvey Secretary, Treasurer April 16, 1999
</TABLE>
<PAGE> 66
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the December
31, 1998 audited financial statements and is qualified in its entirety by such
financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 748,590
<SECURITIES> 0
<RECEIVABLES> 1,357,833
<ALLOWANCES> 848,116
<INVENTORY> 868,238
<CURRENT-ASSETS> 2,597,181
<PP&E> 5,806,767
<DEPRECIATION> 732,684
<TOTAL-ASSETS> 9,123,580
<CURRENT-LIABILITIES> 5,159,478
<BONDS> 0
0
1,510,500
<COMMON> 7,718
<OTHER-SE> 7,427,082
<TOTAL-LIABILITY-AND-EQUITY> 9,173,580
<SALES> 2,870,714
<TOTAL-REVENUES> 2,870,714
<CGS> 2,859,684
<TOTAL-COSTS> 3,383,159
<OTHER-EXPENSES> 2,106,641
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 299,735
<INCOME-PRETAX> (2,461,829)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,461,829)
<EPS-PRIMARY> (0.41)
<EPS-DILUTED> (0.41)
</TABLE>
