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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
File No. 333-76551
PRE-EFFECTIVE AMENDMENT NO. 1
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 2026 62-1681831
- ------------------------------- ---------- ----------------
(State or other jurisdiction of SIC Number (I.R.S. Employer
incorporation or organization) Identification No.)
11300 US Highway 1, Suite 202, North Palm Beach, Florida 33408 USA
------------------------------------------------------------------
(Address of principal executive offices)
Telephone number: (561) 625-1411
--------------
Susan Lurvey, Secretary
China Peregrine Food Corporation
11300 US Highway 1, Suite 202
North Palm Beach, FL 33408
(561) 625-1411
(Name, address and telephone number of agent for service)
Copies To:
Roy D. Toulan, Jr., Esquire
Stibel & Toulan LLP
183 State Street
Boston, Massachusetts 02109
(617) 523-6000
--------------
Approximate date of proposed sale to the public:
From time to time after the effective date of this Registration Statement.
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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 offering aggregate Amount of
to be to be Dollar amount price offer registration
registered registered to be 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 9, 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.
PROSPECTUS
CHINA PEREGRINE FOOD CORPORATION
11300 US HIGHWAY 1, SUITE 202
NORTH PALM BEACH, FL 33408
(561) 625-1411
========================================
THE RESALE OF 2,461,804 SHARES OF
COMMON STOCK
(PAR VALUE $.001 PER SHARE)
========================================
This Prospectus covers the resale of up to 2,461,804 shares of Common Stock
by certain Selling Shareholders. The issued Common Stock will be offered
for resale from time to time in the over-the-counter market at the
prevailing market price or in negotiated transactions. The Selling
Shareholders and the amount of Common Stock which each may offer for resale
are as follows:
* Austinvest Anstalt Balzers; up to 777,887 shares of common stock
* Esquire Trade & Finance, Inc; up to 777,887 shares of common stock
* Amro International, S. A.; up to 837,725 shares of common stock
* Settondown Capital International, Ltd.; up to 68,305 shares of
common stock
The closing bid price of the common stock the NASD OTC Bulletin Board on
June 24, 1999 was $1.68
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" STARTING ON PAGE 6.
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.
Subject To Completion
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.
The date of this Prospectus is June 24, 1999.
TABLE OF CONTENTS
PROSPECTUS SUMMARY 4
The Company 4
The Offering 4
RISK FACTORS 6
We Have a Limited Operation History 6
We Will Have a Need for Additional Financing 6
Additional Financing Will Result in Dilution 6
We Depend upon Key Personnel 6
The Liability of Our Directors Is Limited 6
There Is a Limited Market for Our Common Stock 7
There Exist Potential Risks of Low Priced "Penny" Stock 7
Future Sales of Common Stock Could Depress the Market Price 8
The Exercise of Warrants and Options Could Depress the Market Price 8
We Will Not Realize Any Proceeds from the Resale of the Common Stock 9
We Have Continuing Operating Losses 9
We Have Significant Competition in China 9
SELLING SHAREHOLDERS 10
PLAN OF DISTRIBUTION 11
LEGAL PROCEEDINGS 12
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS 13
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 16
DESCRIPTION OF SECURITIES 19
Common Stock 19
Series A Convertible Preferred Stock 20
Series B Convertible Preferred Stock 21
Series C Convertible Preferred Stock 23
Series D Convertible Preferred Stock 24
Series E Convertible Preferred Stock 26
INTEREST OF NAMED EXPERTS AND COUNSEL 27
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION
FOR SECURITIES ACT LIABILITIES 27
ORGANIZATION WITHIN THE LAST FIVE YEARS 28
THE BUSINESS OF THE COMPANY 31
General 31
Principal Products, Markets and Distribution 32
Acquisition Activities and Strategy 36
Doing Business in China 37
Employees 38
MANAGEMENT DISCUSSION AND ANALYSIS OF OPERATIONS 38
General 38
Years Ended December 31, 1996 and 1997 40
Liquidity and Capital Resources 42
Years Ended December 31, 1997 and 1998 42
Liquidity and Capital Resources 44
Period from January 1, 1999 to March 31, 1999 45
Liquidity and Capital Resources 46
Debt Structure 47
Effects of Inflation 49
Effect of Fluctuation in Foreign Exchange Rates 49
Future Operations 49
Disclosure Regarding Forward Looking Statements 49
New Accounting Standards Not Yet Adopted 50
Year 2000 Statement 51
DESCRIPTION OF PROPERTY 52
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 53
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 54
EXECUTIVE COMPENSATION 58
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE 61
FINANCIAL STATEMENTS F-1
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information, including "RISK FACTORS" and our Financial Statements,
appearing elsewhere in this Prospectus. The discussion in this Prospectus
contains forward-looking statements that involve risks and uncertainties.
Actual results could differ materially from those discussed in this
Prospectus.
THE COMPANY
China Peregrine Food Corporation is a Delaware corporation formed on April
26, 1996. Presently, we own a 70% interest in a Sino-American joint venture
in China known as Green Food Peregrine Children's Food Co. Ltd. ("Green Food
Peregrine"), and a 52% interest in a similar joint venture known as
Hangzhou Meilijian Dairy Products Co., Ltd., ("Hangzhou Meilijian"). Green
Food Peregrine and Hangzhou Meilijian are in the business of processing and
distributing dairy and non dairy food products in the People's Republic of
China. Green Food Peregrine owns and operates a dairy processing plant in
Shanghai and Hangzhou Meilijian has a like operation in Hangzhou, which is
located approximately 110 miles Southwest of 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 us
(70%) and our 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 Hangzhou
Meilijian joint venture, which was established on July 25, 1993, has
registered capital of US $5,100,000. We have a 52% equity in this in this
joint venture, with the remaining 48% of Hangzhou Meilijian owned by
Hangzhou Dairy Co., a controlled entity of the regional Chinese government.
Through our subsidiaries, Green Food Peregrine and Hagnzhou Meilijian, we
engage in the business of the processing, marketing and distribution of
dairy products in the People's Republic of China. Presently, the our
primary business activities are in the Shanghai and Hangzhou markets. Our
business plan also involves the acquisition of other dairy processing plants
in cities located in the People's Republic of China having a population of
at least two million. In conjunction with our Chinese partner in the Green
Food Peregrine joint venture, we are exploring and negotiating the potential
acquisition of four additional dairy processing facilities, which presently
are state owned.
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.
Common Stock to be
outstanding after the offering There are currently 8,403,462 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 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
Convertible Preferred Shares, which may
occur from time to time, and the payment
of dividends. As the conversion prices of
the preferred stock 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 to be offered assumes a 200%
reserve for 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. The actual number of shares of
common stock issued is based upon
fluctuations in the conversion prices and
the exercise of warrants and commission
warrants. The total number of shares of
the common stock issued and outstanding
could be 10,865,266, if
* all Series D Shares are converted
* dividends are paid in shares of Common
Stock for a two year period
* all of the Warrants are exercised.
Use of Proceeds We will not receive any proceeds of the
resales of the Shares covered by this
Prospectus, all of which will be paid
to the Selling Shareholders. We have
received approximately $705,000 in net
proceeds from the sale of the Series D
preferred stock and will receive up to an
additional $250,000 in proceeds upon the
effective date of this registration
statement. In addition we may receive up
to an additional $444,000 from the
exercise of the warrants and commission
warrants.
Trading Symbol for the
Common Stock on the NASD
OTC Bulletin Board: CHPF
AVAILABLE INFORMATION
As of the filing of the registration statement of which this Prospectus is a
part, we have filed all required periodic reports with the Securities and
Exchange Commission. Information that is incorporated by reference in this
Prospectus will be provided, free of charge, upon written request specifying
the information sought, directed to our executive offices located at 11300
US Highway 1, Suite 202, North Palm Beach, Fl 33408. The telephone number
at that address is (561) 625-1411.
RISK FACTORS
Prospective purchasers of the Shares offered for resale pursuant to this
Prospectus should consider carefully all of the information in this
Prospectus and, in particular, should evaluate the following risks in
connection with an investment in the Shares.
WE HAVE A LIMITED OPERATING HISTORY
Our current business commenced in 1994. Prior to that time, we had no
operations upon which an evaluation of the Company and its prospects could
be based. There can be no assurance that we will
* be successful in completing our product development programs
* implement the corporate infrastructure to support operations at the
levels called for by our business plan
* conclude a successful sales and marketing plan
* attain significant penetration of the market
* 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 March 31, 1999 the Company had an
accumulated deficit of $8,028,460 and total shareholders equity of
$1,896,210.
WE WILL HAVE A NEED FOR ADDITIONAL FINANCING
While we have been successful to date in raising sufficient money to support
our marketing and development efforts, there can be no assurance that
additional financing will not be necessary or that such other financing
would be available on satisfactory terms or at all. Failure to obtain such
financing could materially slow production and impair our ability to
increase sales and sustain profitability.
ADDITIONAL FINANCING WILL RESULT IN DILUTION
We may be required or may choose to sell equity securities to obtain
financing in the future including the sale of additional preferred stock to
the selling security holders. If we sell additional equity securities at a
price per share less than the purchase price at which the Shares of Common
Stock are offered, investors purchasing Shares of Common Stock in this
offering would incur additional dilution.
WE DEPEND UPON KEY PERSONNEL
We will be dependent on our 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 our operations and prospects. At this
time, we have no employment agreements with any of these individuals, and we
do not currently have any "key man" life insurance on any employees.
THE LIABILITY OF OUR DIRECTORS IS LIMITED
Our Articles of Incorporation and By-Laws include provisions that eliminate
the personal liability of our directors 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 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
* breach of the director's duty of loyalty
* acts or omissions not in good faith or involving intentional
misconduct or knowing violation of law
* payment of dividends or repurchases of stock other than from
lawfully available funds
* any transaction from which the director derives 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 under such laws.
THERE IS A LIMITED MARKET FOR OUR COMMON STOCK
In November of 1997, our 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 trading symbol "CHPF." Prior to
that time there was no public market for the common stock. Since it has
begun trading, there has been a limited inter-dealer market for the common
stock. Assuming we can meet the minimum listing requirements, we intend to
apply for a listing of our common stock on NASDAQ. There can be no
assurance, however, that we will meet the listing requirements of such
exchange or that our common stock will be approved for trading on such
exchange. In addition, sales of substantial numbers of the Shares covered
by this Prospectus into the existing inter-dealer market could have a
depressive effect on the market price of our common stock. Such depressive
effect could keep the price per share of the common stock below that
required for initial listing of our 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.
THERE EXIST POTENTIAL RISKS OF LOW PRICED "PENNY" STOCK
If the price per share of the common stock on the NASD OTC Bulletin Board
continues to trade at below $5 per share, the Common Stock will 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. These 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 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 COULD DEPRESS THE MARKET PRICE
Current shareholders of the common stock own all of the 8,403,462 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 Common Stock.
While we cannot predict the impact of the public resale into the market of
any of such shares on the public trading price of the 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.
We anticipate that the Selling Shareholders may offer for resale all of the
Shares of Common Stock issuable upon conversion of the preferred shares 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
Common Stock.
THE EXERCISE OF WARRANTS AND OPTIONS COULD DEPRESS THE MARKET PRICE
Assuming the maximum subscription to the Series D Convertible Preferred
Offering and the Series E Convertible Preferred Offering, we will have
outstanding the following warrants and options:
* 557,000 warrants exercisable purchase an aggregate of 557,000
shares of common stock at an exercise price of $1.00 per share,
having an expiration date of June 30, 2003;
* Series D Warrants exercisable to purchase an aggregate of 150,000
shares of common stock at an exercise of $2.96 per share, having an
expiration dates in 2002.
* 100 Series E Warrants exercisable to purchase an aggregate of
500,000 shares of common stock at an exercise of $3.00 per share,
having an expiration dates in 2001;
* Series E Warrants exercisable to purchase an aggregate of 100,000
shares of common stock comprising part of the Placement Agent
Warrants at an exercise price of $2.75 per share, having an
expiration dates in 2001;
* Series E Warrants exercisable to purchase an aggregate of 100,000
shares of common stock comprising part of the Placement Agent
Warrants at an exercise price of $5.00 per share, having an
expiration dates in 2001; and
* options to purchase 3,100,533 shares of common stock pursuant to
1997 and 1999 stock option plans at a purchase price of $1.00 per
share, having expiration dates in 2002 (as to 3,045,533 shares) and
2004 (as to 55,000 shares), respectively.
While all of such warrants are not immediately exercisable, any exercise
could cause immediate and substantial dilution. In addition, holders of such
warrants are likely to exercise them when, in all likelihood, we could
obtain additional capital on terms more favorable than those provided by
such warrants. While these warrants are outstanding, our ability to obtain
additional financing on favorable terms may be adversely affected. Moreover,
if the common stock issuable upon the exercise of the warrants and options
is sold in the public market, such sales may adversely affect the market
price of the Common Stock.
WE WILL NOT REALIZE ANY PROCEEDS FROM THE RESALE OF THE COMMON STOCK
We previously received approximately $705,000 in net proceeds from the sale
of the Series D preferred stock and will receive up to an additional
$250,000 in proceeds upon the effective date of this registration statement.
In addition, we 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 our benefit.
WE HAVE CONTINUING OPERATING LOSSES
As reflected in the accompanying financial statements, we incurred
substantial net losses in the past two years. In 1997, we 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 applicable to common shares
increased to $2,660,780, representing a net loss per common share of
$(0.41). As of March 31, 1999, we had a net loss for the first quarter of
1999 of $961,414, representing a net loss per common share of $(0.13).
WE HAVE SIGNIFICANT COMPETITION IN CHINA
The sale of dairy products, in large urban areas of the Peoples' Republic of
China, is a highly competitive business. We face 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 us. The ability of such
competition to sell dairy products at prices below prices charged by us for
our products may represent an obstacle to our ability to secure a market
share at revenue levels sufficient to achieve profitability.
SELLING SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of Common Stock by the Selling Stockholders as of the effective
date of this registration statement, and the number of shares of Common
Stock covered by this Prospectus.
<TABLE>
<CAPTION>
Number of Shares of Number of Shares
Common Stock Beneficially Number of Shares of Common Stock
Owned at initial conversion Common Stock Offered Owned After
price (1)(4) Hereby (2)(4) Offering (3)
Name and Address --------------------------- -------------------------- -----------------
Of Stockholder # of Shares % of Class # of Shares % of Class # of Shares
- ---------------- ----------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
AUSTINVEST ANSTALT BALZERS 202,657 2.22% 777,887 7.16% -0-
(A Lichenstein corporation)
Landstrasse 938
9494 Furstentums
Balzers, Liechtenstein
ESQUIRE TRADE & FINANCE INC. 202,657 2.22% 777,887 7.16% -0-
(A B.V.I. corporation)
Trident Chambers
P.O. Box 146
Road Town, Tortola, B.V.I.
AMRO INTERNATIONAL, S.A. 218,050 2.39% 837,725 7.71% -0-
(A Panama corporation)
c/o Ultra Finanz
Grossmuenster Platz 26
P.O. Box 4401
Zurich, Switzerland CH 8022
SETTONDOWN CAPITAL 68,305 0.812% 68,305 0.628% -0-
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 an 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 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 resale of all Shares offered herein.
<F4>(4) The Selling Shareholders have agreed to restrict their 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>
BENEFICIAL OWNERS
Austinvest Anstalt Balzers is owned by B.A.W.A.G. Bank, (Austria)
Esquire Trade & Finance Inc., is owned by Mr. Matithyahu Kaniel, Israel
Amro International, S.A., is owned by Mr. Mark Perkins, Monte Carlo, Monaco.
Mr Perkins is a British citizen.
Settondown Capital International, Ltd., is owned by Mr. Anthony Inderriden,
Nassau, Bahamas.
None of the Selling Shareholders or their respective beneficial owners are
affiliates of the Company.
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.
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.
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.
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 and Director
Roy G. Warren President, Chief Executive Officer 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 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 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 four years ending
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.
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, Chief Executive Officer 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 June 23, 1999, 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.
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>
Name & Address of (2) Amount & Nature of (3) Percent of (4)
Title of Class (1) Beneficial owner Beneficial Owner Class
- ------------------ --------------------- ---------------------- --------------
<S> <C> <C> <C>
Common Mr. Dale Reese 3,157,985 21.60%
125 Kingston Road
Media, PA 19063
Common American Flavors China, Inc. 1,531,685 10.47%
(Noam & Florence Sender)
1007 Chestnut Street
Newton, MA 02164
Common Mr. Paul Downes c/o 2,202,327 15.06%
Tamarind Management., Ltd.
31 Broad Street
P.O. Box 23
St. Helier Channel Islands
Common Mr. Charles Beech c/o 1,070,914 7.32%
Peregrine Enterprises, Inc.
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:
Number of Shares of
Common Stock (Issued
or Capable of Being
Holder Type of Security Acquired)
------ ---------------- --------------------
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
Mr. Paul Downes Common 24,182
Peregrine
Enterprises, Inc. Common 360,000
Mr. Charles Beech Common 200,000
Options 510,914
<F4>(4) 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 1998 - 1999, 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>
Name & Address of Amount & Nature of Percent of
Title of Class Beneficial Owner Beneficial Owner(1) Class
- -------------- ----------------- ------------------- ----------
<S> <C> <C> <C>
Common Mr. Paul Downes 2,202,327 15.06%
(Director)
5646 Windrift Lane
Boca Raton, FL 33433
Common Mr. Charles Beech 1,070,914 7.32%
(Chairman/Director)
4339 Gwynne Road
Memphis, TN 38117
Common Roy G. Warren 598,914 4.09%
(President/CEO/Director)
1128 Country Club Road
N. Palm Beach, FL 33408
Common Robert Cummings 400,000 2.73%
(Director)
2829 N.E. 44th Street
Lighthouse Point, FL 33064
Common Michael G. Lucci 410,000 2.80%
(Director)
49 Spanish River Drive
Ocean Ridge, FL 33435
Common John McCormack 200,000 1.36%
(Director)
8750 South Grant
Burridge, IL 60521
Common Phillip Pearce 25,000 0.17%
(Director)
6624 Glenleaf Court
Charlotte, NC 28270
Common Michael L. Davis 25,000 0.17%
(CFO)
20 Harris Avenue
Hamptom Beach, NH 03843
Common Susan Lurvey 12,000 0.082%
(Treasurer/Secretary)
6340 Fox Run Circle
Jupiter, FL 33458
Common All directors and 4,944,155 33.81%
executive 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:
</FN>
</TABLE>
<TABLE>
<CAPTION>
Number of Shares of
Common Stock (Issued
or Capable of Being
Holder Type of Security 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
John McCormack Common 100,000
Warrants 100,000
Phillip Pearce Common 25,000
Michael L. Davis Options 25,000
Susan Lurvey Common 12,000
</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 five 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; 115,000 shares of Series D Convertible Preferred Stock, having a
par value of $0.001 and a Stated Value of $10.00 per share; and 1,500,000
shares of Series E Convertible Preferred Stock, having a par value of $0.001
and a Stated Value of $2.50 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 D Convertible Preferred Stock and Series E Convertible
Preferred Stock as of June 23, 1999. All such stock is fully paid and
nonassessable.
Common Stock 8,403,462
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 78,500
Convertible Preferred Stock (Series E) none issued
COMMON STOCK
The following is a summary of certain rights and provisions of the shares of
our 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.
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 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.
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.
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.
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) amend its certificate of incorporation,
bylaws or other charter documents so as to affect adversely any rights of
any holders, (d) increase the authorized number of shares of Series C
Convertible Preferred Stock and (e) 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.
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 C 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.
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, 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 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.
Series E Convertible Preferred Stock Consisting of 1,500,000 Shares.
Dividends
- ---------
Each share of Series E 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 ($2.50 per share) of the Series E
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 E Convertible preferred stockholders before any dividend
or other distribution paid or declared and set apart for payment on any
shares of Common Stock ("Junior Stock"), and in pari passu with any
dividend or other distribution paid or declared and set apart for payment on
any shares of any Series A Preferred Stock, Series B Preferred Stock, and
Series C Preferred Stock ("Parity Stock"), but subordinate to the payment or
declaration of any dividends or other distributions to the holders of 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 E
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
E Convertible Preferred Stock are outstanding, however, the Company shall
not (a) alter or change adversely the powers, preferences or rights given to
the Series E Convertible Preferred Stock, (b) alter or amend this
Certificate of Designation, (c) amend its certificate of incorporation,
bylaws or other charter documents so as to affect adversely any rights of
any holders, (d) increase the authorized number of shares of Series E
Convertible Preferred Stock.
Conversion
- ----------
The holders of Series E Convertible Preferred stock shall be entitled to
convert such stock into the Company's common stock at any time subsequent to
the issuance of such stock, subject to a one year "lockup" agreement entered
into by the holders of such stock. The number of shares of common stock
issuable upon conversion of each share of Series E 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 greater of:
(i) $2.00 per share of common stock or (ii) 80% of the average of the
closing bid prices for the 5 trading days immediately preceding the
conversion of the respective shares of Series E Preferred Stock, but in no
event shall the conversion price be greater than $3.00 per share of common
stock.
Adjustments to Conversion Price
- -------------------------------
If the Company, at any time while any shares of Series E Convertible
Preferred Stock are outstanding, shall (a) pay a stock dividend or otherwise
make a distribution or distributions on other securities of the Company, (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 or any
shares of capital stock of the Company, then in each such event the
Conversion Price shall be adjusted proportionately so that the Holders of
Series E Preferred Stock shall be entitled to receive the kind and number of
shares or other securities of the Corporation which such Holders would have
owned or have been entitled to receive after the happening of any of the
events described above had such shares of Series E Preferred Stock been
converted immediately prior to the happening of such event.
Liquidation Preference
- ----------------------
Upon any liquidation, dissolution or winding-up of the Company, whether
voluntary or involuntary, the holders of Series E 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 E Convertible
Preferred Stock an amount equal to the Stated Value plus all accrued but
unpaid dividends per share, whether declared or not, before any payment or
distribution shall be made on the Junior Stock and in pari passu with the
Parity Stock, but subordinate to the Series D Preferred Stock, out of the
assets of the Corporation available for distribution to stockholders.
Automatic Conversion
- --------------------
At the option of the Corporation, the shares of Series E Preferred Stock and
dividends not previously converted into shares of Common Stock shall be
converted into shares of Common Stock at the Conversion Price without
further action of the Holder provided (i) the shares of Common Stock
issuable upon conversion of the Preferred Stock have been registered under
the Securities Act, and (ii) the Common Stock has traded at or above $9.00
per share for thirty (30) consecutive trading days, ending within ten (10)
days of the notice of the Automatic Conversion.
INTEREST OF NAMED EXPERTS AND COUNSEL
The Report on Audited Consolidated Financial Statements of the Company as of
December 31, 1997 and December 31, 1998, included in this Prospectus, have
been included herein in reliance upon the consent of BDO Seidman, LLP,
independent certified public accountants, given upon the authority of said
firm as experts in accounting and auditing.
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
ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
The 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 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 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 interests in two
Sino-American joint ventures in China known as Green Food Peregrine and
Hangzhou and Meilijian respectively. 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.
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.
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.
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 and the Company. Final governmental approval for the amended
Articles of Association was obtained on July 31, 1998.
As part of the March 5, 1997 transaction between the Company and China
Peregrine Enterprises, the Company (through a loan from shareholders of the
Company) contributed approximately US $1,300,000 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 capital. The monies
loaned by the shareholders 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
was subject to formal approval by the regional government agency. In the
interim period, the operational control of Hangzhou Meilijian was
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 torun 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.
The total registered capital of Hangzhou and Meilijian is US $5,100,000,
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 in cash and equipment.
THE BUSINESS OF THE COMPANY
GENERAL
- -------
The Company is headquartered in North Palm Beach, Florida. The Company
directs the operations of its subsidiaries, Green Food Peregrine and
Hangzhou Meilijian, from that location and through frequent trips to China
by the Company's executive management. 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 and the Meilijian operation in
Hangzhou. 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 and Hangzhou Meilijian 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 and Hangzhou 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 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, through acquisitions of existing dairy
processing 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 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. 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.
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 Family[TM] 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. Pricing in Hangzhou,
which operates primarily under the "reserve" system selling baggie milk, is
competitive with other dairy producers in the area.
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
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 existed in
Shanghai, with Green Food Peregrine distributing its product to
approximately 50% of these stores. A significant portion of the remaining
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 three
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 350
super stores and chain stores. These 350 stores are the largest of this
type in Shanghai and represent approximately 65% of the milk business in
area chain stores. Given that the number 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. The financing required for these activities will be provided by
sales of the Company's securities.
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.
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. 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 Family[TM] 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 Family[TM] brand. Green
Food Peregrine strategy is to continue to build the Happy Family[TM] 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 Family[TM] products.
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 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.
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
The Company has four full time employees located at its North Palm Beach
corporate offices. Green Food Peregrine has 75 employees servicing its
Shanghai facility, functionally categorized as follows: management, 4;
administrative, 10; manufacturing 41; and distribution, 20. Hangzhou
Meilijian currently employes approximately 400 workers with 25 assigned
management duties and the balance split between prodution and distribution.
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
follows, as well as the Report on Audited Consolidated Financial Statements
For The Years Ended December 31, 1996 and 1997, the Report on Audited
Consolidated Financial Statements For The Years Ended December 31, 1997 and
1998, and the Company's unaudited financial statements for thge perior
ending March 31, 1999. Since, for reporting purposes, a "reverse"
acquisition occurred in March of 1997, between the Company and China
Peregrine Enterprises, 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 subsidiaries, Green Food Peregrine and Hagnzhou
Meilijian, 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 and
Hangzhou markets. The business of the Company also involves the acquisition
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 recently occurred
on July 31, 1998. Accordingly, the following historical discussion and
analysis does not include the Hangzhou Meilijian operation prior to the
third quarter of 1998.
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 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.
Restriction of Transfer of Funds
Presently, the business of the Company is entirely in the People's Republic
of China. Under current Chinese law, the conversion of RMB into foreign
currency requires government consent. In order to pay the Company fees and
dividends, and to provide funds for the Company to pay dividends to its
stockholders, Green Food Peregrine and Hangzhou Meilijiam will need to
convert RMB into US dollars. To date, the conversion of currency has not
been a problem. Government authorities, however, may impose restrictions,
which could impact this flexibility.
YEARS ENDED DECEMBER 31, 1996 AND 1997
FINANCIAL CONDITION
General
- -------
For the years ending December 31, 1996 and 1997, the Company had accumulated
deficits of US $2,206,628 and US $4,370,266, respectively. As of December
31, 1997, the Company had cash on hand of US $435,630 and reported total
shareholders' equity of US $807,976.
RESULTS OF OPERATIONS
On March 5, 1997, the Company purchased the assets of China Peregrine
Enterprises Limited. For financial reporting purposes, China Peregrine
Enterprises Limited is considered the predecessor to the Company and its
operations have been integrated in the financial reporting of the Company
for the fiscal year 1996 and the first two months of 1997 as this
transaction was accounted for in a way similar to a pooling of interests.
Year Ended December 31, 1996
- ----------------------------
For the fiscal year ending December 31, 1996, the Company had net sales of
$485,682 and a gross loss of $113,830. In addition to the $599,512 cost of
sales, the Company had selling expenses of $230,842, and general and
administrative expenses of $1,068,839. After interest expenses of $448,272
and other net income of $53,785, the Company had a net loss before income
taxes of $1,807,998. Since the Company does not own 100% of the equity
interest in Green Food Peregrine, its share of the loss before income taxes
amounted to $1,331,763, resulting in a basic loss per share of $1.28.
General and administrative expenses have been and are projected to be a
significant percentage of revenue at this stage of the Company's existence.
The loss from operations for the 1996 year was due primarily to the high
level of general and administrative expense as a percentage of revenue
combined with the continuing attempts, as a Company in only its first full
year of operation, to penetrate an emerging market with a product whose
qualitative virtues were largely unknown to the ultimate consumer.
Year Ended December 31, 1997
- ----------------------------
For the fiscal year ending December 31, 1997, the Company had net sales of
$730,195 and had a gross loss of $122,082. In addition to the $852,277 cost
of sales, the Company had selling expenses of $380,836, and general and
administrative expenses of $1,873,360. After interest expenses of $234,517
and other net income of $58,200, the Company had a net loss before income
tax of $2,552,595. Since the Company does not own 100% of the equity
interest in Green Food Peregrine, its share of the loss before income taxes
amounted to $2,078,588, resulting in a basic loss per share of $0.59.
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 1997 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 acquisition of the assets of China Peregrine
Enterprises (its majority equity interest in the Green Food Peregrine joint
venture) and two fund raising exercises in 1997. 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).
Year Ended December 31, 1997 Compared to Year
- ---------------------------------------------
Ended December 31, 1996
-----------------------
Revenues increased almost 50% to $730,195 in 1997 from $485,682 in 1996.
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.
Cost of goods sold increased approximately 42% to $852,277 in 1997 from
$599,512 in 1996. 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 117% in
1997 from 123% in 1996. Consequently, the gross profit ratio was increased
to negative 17% in 1997 from negative 23% in 1996. The reason for the loss
was that the production volume was still under the necessary volume that
would bring the Company to a break-even level.
Selling expenses increased approximately 65% to 380,836 in 1997 from 230,842
in 1996. The increase was due mainly to the continuing efforts to penetrate
Shanghai market. As a percentage of revenues, selling expense increased to
52% in 1997 from 48% in 1996. We believe that the increase in selling
expense was justifiable as it increased the total revenue in 1997.
General and administrative expenses increased approximately 75% to
$1,873,360 in 1997 from $1,068,839 in 1996. This increase reflects the
almost $1.09 million of $1.87 million in expenses incurred in the U.S. that
were associated with reorganization of the ownership structure of the
business, the acquisition of the assets of China Peregrine Enterprises
Limited (its majority equity interest in Green Food Peregrine), two fund
raising exercises, and a part of the acquisition of some of the assets of
American Flavors China, Inc. (its majority equity interest in the Hangzhou
Meilijian joint venture). With respect to the general and administrative
expense in China operation, total general and administrative expenses
decreased approximately 16% to 782,503 in 1997 from 916,386 in 1996.
Overall, as a percentage of the total revenue, the general and
administrative expenses increased to 256% in 1997 from 220% in 1996.
Interest expense decreased approximately 48% to $234,517 in 1997 from
$448,272 in 1996. The reduction in interest expense was a result of the
reduction of the outstanding loans from US $2,489,182 in 1996 to US
$1,231,914 in 1997, even though the total interest expense in 1997 already
included the penalty interest imposed to Green Food Peregrine for the
outstanding loans payable to two Chinese commercial banks.
Consequently, the net loss applicable to the Company increased approximately
62% to $2,163,638 in 1997 from $1,331,762 in 1996. The net loss applicable
to the Company as a percentage of revenue increased to 285% in 1997 from
274% in 1996.
Based on the results of operations, the Company reported a loss per share of
$1.28 in 1996 and $0.59 in 1997. The decrease in the loss per share was due
to the new issuance of common shares. As of December 31, 1996, there were
1,040,000 shares of common stock outstanding while as of December 31, 1997
there were 5,289,000 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 1997 was 3,681,827. The loss per share in 1997
decreased by approximately 54% compared with 1996.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1996, the Company reported that net cash provided by
operating activities was $243,544, net cash used in investing activities was
$303,265, and net cash provided by financial activities was $133,080 with
the effect of changes in exchange rates at a negative $39,073.
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 financing activities was $2,430,506
with the effect of changes in exchange rates at $5,468.
Net cash used in operating activities increased 892% to $1,929,803 in 1997
from $243,544 of net cash provided by operating activities in 1996. The
increase in negative cash flow in operating activities reflects the increase
in net loss in 1997 that was attributed to the majority of general and
administrative expense incurred in U.S. side, the reduction in accounts
payable in China operation, and increase in prepaid assets and other assets.
Net cash used in investing activities decreased approximately 57% to
$128,727 in 1997 from $303,265 in 1996. The decrease was due mainly to the
fact that there were no significant additions to fixed assets located in
China.
Net cash provided by financing activities increased 1726% to $2,430,506 in
1997 from $133,080 in 1996. The major reason for this increase was due to
two fund raising exercises conducted in 1997. A Rule 504, Regulation D
offering and a Section 4(2) private placement provided a total of $2,475,000
of cash that allowed the Company to acquire the assets from China Peregrine
Enterprises Limited and the infusion of working capital in Green Food
Peregrine.
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 $0.41.
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 the 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 the Shanghai market and the inclusion of 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 18% to
$2,461,829 in 1998 from $2,078,588 in 1997. The net loss applicable to the
Company as a percentage of revenue decreased to 86% in 1998 from 285% in
1997.
Based on the results of operations, the Company reported a loss per share of
$0.59 in 1997 and $0.41 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 6,430,337. The loss per share in 1998
decreased by approximately 31% 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 $1,205,399, 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 38% 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 151% to
$322,337 in 1998 from $128,727 in 1997. The increase mainly was due to the
acquisition of a majority interest in Hangzhou Meilijian
Net cash provided by financing activities decreased 26% 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 Chinese state-owned banks, including principal
and interest in the aggregate amount of approximately US $2,000,000. 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. On
June 21 , 1999, the Company commenced a $2.5 million private placement
offering of Series E Comvertible Preferred Stock. As of the date of this
Prospectus, no securities had been sold under that offering.
PERIOD FROM JANUARY 1, 1999 TO MARCH 31, 1999
RESULTS OF OPERATIONS
At March 31, 1999, the Company had an accumulated deficit of $8,028,460.
The Company had cash on hand of $876,033 and reported total shareholders'
equity of $1,896,210.
The Company had net sales of $1,246,413 and a gross profit of $132,789. In
addition to the $1,113,624 of cost of sales, the Company had selling
expenses of $192,480 and general and administrative expenses of $765,731.
After interest expenses of $86,300 and other net expenses of $1,456 and the
cumulative effect of a change in accounting principle of $259,719, the
Company had a net loss of $961,414, resulting in a loss per share of $.13.
As in the prior period, general and administrative expenses for the three
months ended March 31, 1999 have been and are continuing to be a significant
percentage of revenue at this stage of the Company's existence.
Three Month Period Ended March 31, 1999 Compared to
- ---------------------------------------------------
Three Month Period Ended March 31, 1998
---------------------------------------
Revenues increased almost 677% to $1,246,413 in 1999 from $160,398 in 1998.
The main reason for this is the inclusion of the revenues from Meilijian for
the three months ended March 31, 1999.
Cost of goods sold increased approximately 460% to $1,113,624 in 1999 from
$198,891 in 1998. The increase was due mainly to higher revenue that
requires a corresponding increase in cost of goods sold. However, the cost
of goods sold as a percentage of revenue decreased to 89% in 1999 from 124%
in 1998. Consequently, the gross profit ratio increased to 11% in 1999 from
negative 24% in 1998. The reason for negative gross profit in 1998 was that
the production volume was still under the necessary volume that would bring
the Company to a break-even level.
Selling expenses increased approximately 161% to $192,480 in 1999 from
$73,727 in 1998. This was also due to the inclusion of the operating results
of Meilijian for the three months ended March 31, 1999.
General and administrative expenses increased approximately 54% to $765,731
in 1999 from $498,168 in 1998. The US corporate office's general and
administrative expenses increased approximately 45% to $512,652 in 1999 from
$352,313 in 1998. The general and administrative expenses incurred in the
China operations, increased approximately 74% to $253,079 in 1999 from
$145,855 in 1998. This was also due to the inclusion of the operating
results of Meilijian for the three months ended March 31, 1999. Overall, as
a percentage of total revenue, the general and administrative expenses
decreased to 61% in 1999 from 311% in 1998.
Interest expense increased approximately 122% to $86,300 in 1999 from
$38,857 in 1998. The increase was due to the inclusion of the operating
results of Meilijian for the three months ended March 31, 1999.
Consequently, the net loss applicable to the common shares increased
approximately 46% to $997,414 in 1999 from $680,831 in 1998. The net loss
to the common shares as a percentage of revenue decreased to 80% in 1999
from 424% in 1998.
The Company reported a loss per share of $0.13 in 1999 and $0.13 in 1998.
The status quo in the loss per share was due to new issues of common shares.
As of March 31, 1998 there were 5,464,272 shares of common stock outstanding
and as of March 31, 1999 there were 8,403,462 shares of common stock
outstanding. Due to the timing of issuance of new shares, the weighted
average number of common shares outstanding in 1999 was only 7,979,103. The
loss per share in 1999 remained approximately constant compared to that in
1998.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31 1998, the Company reported that net cash used in operating
activities was $315,391 and net cash provided by financial activities was
$922,813 with a negative $6,508 effect of exchange rate changes on cash.
As of March 31, 1999, the Company reported that net cash used in operating
activities was $829,464, net cash used in investing activities was $66,333
and net cash provided by financing activities was $1,024,893 with a negative
$1,653 effect of exchange rate changes on cash.
Net cash used in operating activities decreased 163% to $829,464 in the
first three months of 1999 from $315,391 used in operating activities in the
same period of 1998. The cash used in operating activities decreased mainly
due to net losses from operating activities of $961,569.
Net cash used in investing activities increased to $66,333 in the first
three months of 1999 from $1,721 in the same period of 1998.
Net cash provided by financing activities increased to $1,024,893 in the
first three months of 1999 from $922,813 in the same period of 1998. The
major reason for this increase was due to many fund raising exercises
conducted in the first three months of 1999, compared to the advance from
subscribers of $877,500 during the same period in 1998.
The Company's requirements for cash (other than for acquisition activities)
consist of (1) purchasing transportation equipment for distribution of its
products; (2) expenses relating to product development, marketing and
advertising in Shanghai and, to a lesser extent, in Hangzhou; and (3)
repaying loans to state-owned Chinese banks in the aggregate amount of
approximately $2 million by the end of 1999.
CONSOLIDATED STATEMENT OF OPERATIONS--PROFIT (LOSS)
COMPUTATION
Although the Company holds a 70% interest in Green Food Peregrine and a
52% interest in Meilijian, we reported losses attributable to the Company
for 1997 and 1998 equal to approximately 82% of the consolidated losses.
This difference results from the inclusion in the net loss calculation of a
loss to the Company itself in each year, separate and apart from the losses
of our joint venture subsidiaries.
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 paid 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 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 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. As of March 31, 1999, the outstanding amount of these credit
lines, including principal and interest, was approximately $1,400,000.
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 rate of 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 the 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.
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.
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 subsidiaries, Green Food Peregrine and Hangzhou
Meilijian, are located in China. These joint venture companies buy and sell
products in China using Chinese renminbi as functional currency. Based on
Chinese government regulation, all foreign currencies under the category of
current accounts 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
Management's plan for profitable growth has as its focus four areas: (1) the
need for additional capital, (2) the broadening of the product base, (3) the
development of a comprehensive marketing campaign, and (4) the acquisition
of profitable existing dairies.
(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 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 the $1,000,000
Series D Convertible Preferred financing transaction on March 9, 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 with limited registration
rights. On June 21, 1999, the Company commenced the offering period for
this transaction, which has can be closed by the end of July 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.
(4) In December 1998, the Company executed a Letter of Intent with Changchun
Municipal Dairy Farm and China National Green Food Corporation (the
Company's partner in the Green Food Peregrine joint venture), to explore on
an exclusive basis the formation of a new joint venture to acquire the dairy
business of Changchun Municipal Dairy Farm. Presently, the parties are
negotiating a proposed Joint Venture Agreement and Articles of Association
for the formation of this new joint venture . The parties anticipate that
the new joint venture will have total registered capital of between US
$6,000,000 and US $9,000,000, which will be determined by a government
sanctioned appraisal procedure required with respect to foreign investment
joint venture projects in China. Changchun is a city of 6.7 million people
located in the northeast section of China.
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.
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
This Prospectus contains "forward-looking statements" within the meaning of
various provisions of the Securities Act of 1933 and the Securities Exchange
Act of 1934, as amended. All statements, other than statements of
historical facts, included in this Prospectus that address future
activities, events or developments, including such things as future
revenues, product development, market acceptance, responses from
competitors, capital expenditures (including the amount and nature thereof),
business strategy and measures to implement strategy, competitive strengths,
goals, expansion and growth of the Company's business and operations, plans,
references to future success and other such matters, are forward-looking
statements. These statements are based on certain assumptions and analyses
made by the Company in light of its experience and its assessment of
historical trends, current conditions and expected future developments as
well as other factors it believes are appropriate in the circumstances.
Whether actual results will conform to the Company's expectations and
predictions, however, is subject to a number of risks and uncertainties that
may cause actual results to differ materially, including the risks and
uncertainties discussed in this Prospectus; general economic, market or
business conditions; the opportunities (or lack thereof) that may be
presented to and pursued by the Company; competitive actions by other
companies; changes in laws or regulations; and other factors, many of which
are beyond the control of the Company. Consequently, all of the forward-
looking statements made in this Prospectus are qualified by these cautionary
statements and there can be no assurance that the actual results anticipated
by the Company will be realized or, even if substantially realized, that
they will have the expected consequences to or effects on the Company or its
business or operations.
NEW ACCOUNTING STANDARDS NOT ADOPTED YET
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 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, the Green Food Peregrine
facility in Shanghai and the Hangzhou Meilijian facility in Hangzhou,
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 facility, basic record keeping is both
manual and computer assisted. In Hangzhou, the record keeping and
production operation are manually operated. 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 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 subsidiaries currently own
any real property. As of February 1, 1999, the Company moved its corporate
offices from West Palm Beach to 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:
1. 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 is being negotiated for this space.
2. 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).
3. 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.
Hangzhou Meilijian currently leases its plant and land from the City of
Hangzhou, under operating leases which expire December 31, 2013, at the rate
of approximately US $7,900 per month for 1999, US $6,400 per month through
2003 and an aggregate of US $1,164,730 thereafter.
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 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 as a
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 rate of 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.
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 15.06% of all issued
and outstanding common stock and shares of common stock underlying the
preferred stock 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 7.32%
of all issued and outstanding common stock and shares of common stock
underlying the preferred stock 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
Common Stock Market Price
- -------------------------
Of the 8,403,462 shares of the Company's common stock issued and outstanding
as of June 23, 1999, approximately 2,363,456 shares are and will be subject
to over-the-counter trading on the NASD OTC Electronic Bulletin Board, which
trading commenced 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
Q2 (4/1 - 6/23) $3.06 $1.50
</TABLE>
Non-Market Equity Subject to Options, Warrants and Conversion
- -------------------------------------------------------------
Stock Warrants and Options
Assuming the maximum subscription to the Series D Convertible Preferred
Offering and the Series E Convertible Preferred Offering, the Company will
have outstanding the following warrants and options:
(i) 557,000 warrants exercisable purchase an aggregate of 557,00 shares of
common stock at an exercise price of $1.00 per share, having an
expiration date of June 30, 2003;
(ii) Series D Warrants exercisable to purchase an aggregate of 105,250
shares of common stock at an exercise of $2.96 per share, having an
expiration dates in 2002.
(iii) 100 Series E Warrants exercisable to purchase an aggregate of 500,000
shares of common stock at an exercise of $3.00 per share, having an
expiration dates in 2001;
(iv) Series E Warrants exercisable to purchase an aggregate of 100,000
shares of common stock comprising part of the Placement Agent Warrants
at an exercise price of $2.75 per share, having an expiration dates in
2001;
(v) Series E Warrants exercisable to purchase an aggregate of 100,000
shares of common stock comprising part of the Placement Agent Warrants
at an exercise price of $5.00 per share, having an expiration dates in
2001; and
(vi) Options to purchase 3,100,533 shares of common stock pursuant to 1997
and 1999 stock option plans at a purchase price of $1.00 per share,
having expiration dates in 2002 (as to 3,045,533 shares) and 2004 (as
to 55,000 shares), respectively.
While all of such Warrants are not immediately exercisable, any exercise
could cause immediate and substantial dilution. In addition, holders of such
warrants are likely to exercise them when, in all likelihood, the Company
could obtain additional capital on terms more favorable than those provided
by such Warrants. While these Warrants are outstanding, the Company's
ability to obtain additional financing on favorable terms may be adversely
affected. Moreover if the Common Stock issuable upon the exercise of the
Warrants and Options is sold in the public market, such sales may adversely
affect the market price of the Common Stock.
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 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, 1998, 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,
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.
Series D: On March 9, 1999, the Company closed a Regulation D, Rule 506,
private sale of 100,000 shares of Series D Convertible Preferred Stock with
three institutional investors, having an aggregate value of $1,000,000 for
the convertible preferred and the potential for an additional $296,000,
resulting from the exercise of 100,000 Warrants attached to such stock.
These Warrants expire three years after issue and have an exercise price of
$2.96. In the first completed phase of this offering, the Company raised
$500,000 in connection with its issue of 50,000 shares of the Series D
Convertible Preferred Stock, at a price of $10.00 per share, and issued
50,000 Warrants to the three investors. In addition, the Company issued
3,500 shares of Series D Convertible Preferred Stock and 50,000 Warrants for
placement fees. In phase two of this offering, the Company exercised its
rights under the offering's Subscription Agreement to receive an additional
$250,000 in connection with the issue of 25,000 shares of Series D
Convertible Preferred Stock and 25,000 Warrants, upon the filing this
"shelf" registration statement utilizing Form SB-2, with respect to the
resale of the common stock underlying the Series D Convertible Preferred
shares. The Company filed the SB-2 on or about April 16, 1999. In phase
three of the offering, a final 25,000 shares of Series D Convertible
Preferred stock and 25,000 Warrants will be issued for an additional
$250,000, upon the effective date of the SB-2 registration statement.
Series E: On June 21, 1999, the Company commenced its offering of 1,000,000
shares of Series E Convertible Preferred Stock, pursuant to Regulation D,
Rule 506. This offering was made with a minimum of 10 Units and a maximum
of 100 Units, at a purchase price of $25,000 per Unit. Each Unit consists of
(i) 10,000 shares of the Company's Series E Preferred Stock, $.001 par value
per share and $2.50 per share stated value and (ii) a warrant to purchase
5,000 shares of the Company's common stock, $.001 par value per share. The
Preferred Stock is non-voting, convertible into shares of Common Stock, and
bears a cumulative, non-compounded dividend at the rate of six percent (6%)
of the stated value per annum, payable upon conversion of the Preferred
Stock in cash or, at the Company's option, in shares of common stock. The
Warrants are exercisable at a price of $3.00 per share at any time for a
period of two years from the date of issuance.
Rule 144 Stock
- --------------
Of the 8,403,462 shares of Common Stock presently issued and outstanding,
approximately 2,363,456 shares have been held by non-affiliates of the
Company for in excess of one year; an additional 2,695,544 shares of 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 June 23, 1999
- ------------------------
Common Stock 8,403,462 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) 78,500 shares 4 holders
Preferred Stock (Series E) none
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 $198,450 as
of December 31, 1998. The Company booked a dividend charge of $83,334 and
accrued dividends of $2,217 in 1998 resulting from the less than market
conversion price for Company's common stock pursuant to the terms of the
Series C Convertible Preferred Stock. In addition, the Company recorded a
deemed dividend of $35,000 as the value of the beneficial conversion feature
of the Series D Convertible Preferred Stock as of March 31, 1999.
EXECUTIVE COMPENSATION
Summary Compensation Table
- --------------------------
The following table relates to executive compensation paid during 1997 -
1999
<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]
Chief Executive Officer
[5/11/99 to date]
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 5/11/99]
Michael Davis 25,000
Chief Financial Officer
[10/1/97 to date]
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, except for Mr. Davis' Options, which were granted
October 1, 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. Mr. Beech has not
receive compensation as an officer, employee or representative of CPEL
or the Company.
<F4>(4) These options were granted to Tamarind Management, Ltd., an affiliate
of Mr. Downes.
<F5>(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 5.17% $1.00 4-28-2002
President 250,000 8.03% $1.00 4-29-2002
[8/15/97 to date]
Chief Executive Officer
[5/11/99 to date]
Charles Beech 160,914 5.17% $1.00 4-28-2002
Chairman 350,000 11.28% $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 5/11/99]
Dale Reese 700,000 22.57% $1.00 4-29-2002
Chairman/Treasurer
[6/1/97 to 8/15/97]
Michael Davis 25,000 0.8% $1.00 9-30-2002
Chief Financial Officer
[6/97 to date]
Paul Downes (2) 683,705 22.05% $1.00 4-28-2002
Chairman 700,000 23.57% $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>
Securities Underlying Value of "In The Money"
Name & Position Unexercised Options(1) Unexercised Options at 12-31-98(2)
- --------------- ---------------------- ----------------------------------
<S> <C> <C>
Roy G. Warren 410,914 $-0-
President
[8/15/97 to date]
Chief Executive Officer
[5/11/99 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 5/11/99]
Michael Davis 25,000 $-0-
Chief Financial Officer
[6/97 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 1998 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.
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.
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-2
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.
On March 9, 1999, the Company recognized a deemed dividend of $35,000 because
of the beneficial built in conversion feature which allows each share of
Series D preferred stock to be converted into each share of common stock at
80% of the market price on the date of issue.
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.
China Peregrine Food Corporation and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31, 1998 March 31, 1999
----------------- --------------
(Audited) (Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 748,590 $ 876,033
Accounts receivable, less allowances for doubtful
accounts of $648,504 and $648,449 509,717 485,327
Subscription receivable 235,000 -
Other receivable 73,963 207,286
Inventory 868,238 1,166,498
VAT refund receivable 57,069 53,069
Prepaid expenses 84,877 88,708
Deposits 19,727 10,000
------------------------------
Total current assets 2,597,181 2,886,321
Property, plant and equipment, net 5,806,767 5,699,260
Construction in progress 55,735 90,546
Goodwill 293,096 277,109
Licensing agreement, net - 278,571
Trademark and other deferred expenses 119,827 53,614
Proprietary technology, net 52,242 50,149
Start up costs, net 248,732 -
Total assets $9,173,580 9,335,570
==============================
</TABLE>
See accompanying notes to consolidated financial statements.
China Peregrine Food Corporation and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31, 1998 March 31, 1999
----------------- --------------
(Audited) (Unaudited)
<S> <C> <C>
Liabilities and Shareholders' Equity
Current liabilities:
Bank loan in Meilijian $ 1,425,345 $ 1,425,224
Bank loan in GFP 1,147,523 1,147,426
Current portion of obligation - licensing agreement - 63,750
Current portion of note payable 58,104 59,642
Accounts payable 868,760 1,067,668
Accrued liabilities 1,178,563 1,166,100
Accrued payroll 39,162 49,791
Advances from customers 241,354 255,946
Dividends payable 200,667 236,512
-------------------------------
Total current liabilities 5,159,478 5,472,059
Note payable, less current portion 192,741 175,904
Long-term related party loan 677,583 682,775
Obligation - licensing agreement, less current portion - 191,250
-------------------------------
Total liabilities 6,029,802 6,521,988
Minority interest 1,128,787 917,373
Commitments and contingencies
Shareholders' Equity
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 convertible,8% cumulative and redeemable preferred
stock, stated value $3.00 per share , 56,324 shares issued and
outstanding 250,000 168,970
Series D convertible, 6% cumulative and redeemable preferred
stock, stated value $10.00 per share, 53,500 shares issued and
outstanding - 535,000
Common stock; par value $0.001 per share, 20,000,000 shares
authorized, 7,717,957 and 8,403,462 shares issued and
outstanding 7,718 8,403
Additional paid-in capital 7,427,082 8,087,427
Stock subscribed 235,000 -
Accumulated deficit (7,031,046) (8,028,460)
Translation adjustments (134,263) (135,630)
-------------------------------
Total shareholders' equity 2,014,991 1,896,210
-------------------------------
Total liabilities and shareholders' equity $ 9,173,580 9,335,570
===============================
</TABLE>
See accompanying to consolidated financial statements.
China Peregrine Food Corporation and Subsidiaries
Consolidated Statement of Operations
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
March 31, March 31,
1998 1999
------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C>
Sales $ 160,398 $1,246,413
Cost of goods sold 198,891 1,113,624
---------------------------
Gross margin (loss) (38,493) 132,789
Selling expense 73,727 192,480
General and administrative expense 498,168 765,731
---------------------------
Loss from operations (610,388) (825,422)
Other expense:
Interest expense, net 38,857 86,300
Other, net 94,594 1,456
---------------------------
Loss before income taxes (743,839) (913,178)
Income taxes - -
---------------------------
Loss before minority interest (743,839) (913,178)
Less: losses in subsidiaries attributed to minority interest (91,358) (211,328)
---------------------------
Loss before cumulative effect of change in accounting principle (652,481) (701,850)
Cumulative effect of change in accounting principle - write-off of
start up costs - (259,719)
---------------------------
Net loss $ (652,481) (961,569)
Dividends accrued for Series B preferred stock (28,350) (28,350)
Dividends accrued for Series C preferred stock - (5,444)
Dividends accrued for Series D preferred stock - (2,051)
Net loss applicable to common shareholders $ (680,831) (997,414)
===========================
Loss per share $ (0.13) (0.13)
===========================
Weighted average number of common shares outstanding 5,384,351 7,979,103
===========================
Comprehensive loss and its components consist of the Following:
Net Loss $ (652,481) $ (961,569)
Foreign currency translation adjustment (5,736) (1,367)
---------------------------
Comprehensive loss (658,217) (962,936)
</TABLE>
See accompanying notes to consolidated financial statements.
China Peregrine Food Corporation and Subsidiaries
Consolidated Statements of Cash Flows
Increase (Decrease) in Cash and Cash Equivalents
<TABLE>
<CAPTION>
Three Three
Months Ended Months' Ended
March 31, 1998 March 31, 1999
-------------- --------------
(Unaudited) (Unaudited)
<S> <C> <C>
Cash flows from operating activities
Net loss $ (652,481) $ (961,569)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 162,193 493,483
Issuance of stock in exchange for services 61,862 35,000
Minority interest (111,033) (211,415)
Increase (decrease) from changes in:
Accounts receivable 15,658 24,446
Other receivable (64,970) (133,306)
Inventory (3,214) (298,260)
VAT refund receivable 31,525 57,069
Prepaids and other assets 42,425 (56,300)
Deposits 6,661 9,727
Accounts payable 130,747 224,024
Advances from customers 25,552 14,592
Accrued liabilities 39,684 (26,955)
------------------------------
Net cash used in operating activities (315,391) (829,464)
------------------------------
Cash flows from investing activities
Purchase of equipment and machinery (1,721) (31,521)
Additions of construction in progress (34,812)
------------------------------
Net cash used in investing activities (1,721) (66,333)
------------------------------
Increase in notes payable 45,313 -
Increase in related party loan - 5,192
Repayment of note payable - (15,299)
Repayment of loan obligation from licensing agreement - (45,000)
Proceeds of Series C Preferred stock - 135,000
Proceeds of Series D Preferred stock - 500,000
Proceeds from stock warrants exercised - 30,000
Advances from Subscribers 877,500
Proceeds of Section 4(2) private offering - 415,000
------------------------------
Net cash provided by financing activities 922,813 1,024,893
------------------------------
Effect of exchange rate changes on cash (6,508) (1,653)
------------------------------
Net increase in cash and cash equivalents 599,193 127,443
Cash and cash equivalents, beginning of period 435,630 748,590
------------------------------
Cash and cash equivalents, end of period $ 1,034,823 $ 876,033
==============================
Cash paid during the period:
Interest $ 54,257 $ 100,295
Income taxes - -
==============================
</TABLE>
Supplemental disclosure of non-cash activities:
An institutional holder of Preferred stock Series C converted 27,010 shares
into 90,505 shares of common stock from January 4, 1999 through to February
23, 1999.
An institutional holder of Preferred stock Series C converted a total of
50,000 shares of Preferred stock Series C into 150,000 shares of common
stock on February 18, 1999 and February 19, 1999, respectively.(25,000
shares per each conversion)
See accompanying notes to consolidated financial statements.
Organization and Business
China Peregrine Food Corporation (the Company) was incorporated under the
laws of the State of Delaware on April 26, 1996.
The Company and its subsidiaries, Green Food Peregrine (GFP) and Hangzhou
Meilijian (Meilijian), are engaged in the processing, marketing and
distribution of dairy products in the People's Republic of China. Among
the equity interest of GFP, the Company accounted for 70% and China
National Green Food Corporation accounted for 30% as of March 31, 1999. In
Hangzhou Meilijian, the Company accounted for 52% of equity interest and a
Chinese joint venture partner accounted for the remaining equity interest
as of March 31, 1999. 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
Note 1 - Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. All significant inter-company accounts and
transactions have been eliminated in consolidation. The minority interest
in the Chinese joint venture has been reported as a separate line item on
the consolidated balance sheet. The consolidated financial statements are
presented in U.S. dollars. Accordingly, the accompanying financial
statements do not include all the information and footnotes required by
generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal
recurring adjustments) considered necessary for fair presentation have been
included. Operating results for the three-month period ended March 31,
1999 are not necessarily indicative of the results that may be expected for
the year ending December 31, 1999. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's annual report for the year ended December 31, 1998.
China Peregrine Food Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
Note 2 - Income Taxes
As of December 31, 1998, for federal income tax purposes, the Company had
approximately $902,832 in net operating loss carryforwards expiring through
2013. The annual utilization of the operating loss carryforward may be
significantly limited due to the adverse resolution, if any, with respect
to the loss carryover provisions of Internal Revenue Code Section 382 in
connection with certain stock issuances by the Company.
Note 3 - Licensing Agreement with Warner Brothers Consumer Products Co.
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 character images and names in the Shanghai and
Hangzhou greater metropolitan areas. This licensing agreement gives the
Company exclusive rights 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 products in the Shanghai and Hangzhou markets in the
summer of 1999.
The Company recorded the gross amount of $300,000 as licensing agreement
and an obligation to licensing agreement of $300,000 simultaneously. An
amount of $45,000 was payable upon the signing of this agreement and the
balance should be paid by ten installments of $21,250 per installment
payment on or before the following dates: September 30, 1999; December 31,
1999; March 31, 2000; June 30, 2000; September 30, 2000; December 31,
2000; March 31, 2001; June 30, 2001; September 30, 2001; December 31, 2001
and one final payment of $42,500 on or before March31, 2002.
Note 4 - Transactions in Shareholders' Equity
In January 1999, the Company collected net proceeds of $135,000, net of
issuance expenses of $15,000 and issued 50,000 shares of Preferred stock
Series C accordingly.
In March 1999, the Company collected proceeds of $30,000 which represented
30,000 warrants exercised at a price of $1.00 per share and issued 30,000
shares of common stock accordingly. These warrants were issued in November
1998, as part of the Company's Rule 504 offering of its Series C
Convertible Preferred Stock.
From January 1 to March 31, 1999, the company conducted a private sale of
its common stock and received total proceeds of $415,000 with the issue of
415,000 shares of common stock.
In March 1999, the Company conducted a Rule 506, Regulation D offering to
issue 100,000 shares of its Series D Convertible Preferred Stock, with
possible total proceeds of $1,000,000. The Company also issued 3,500
shares of the Series D Preferred Stock at a price of $10.00 per share to
pay a finders fee to a financial institution. On March 9, 1999, the
Company issued 50,000 shares of the Series D Preferred Stock, with gross
proceeds of $500,000. This offering provides for an additional $500,000 in
gross proceeds upon the occurrence of certain events pertaining to the
filing and effective date of an SB-2 "shelf" registration statement for the
resale of the Company's common stock underlying the Series D Convertible
Preferred.
Note 5 - Subsequent Events
On April 16, 1999, the Company filed a SB-2 "shelf" registration statement
with SEC to register the resale of the shares of its common stock
underlying the conversion of the Series D Convertible Preferred Stock and
issued an additional 25,000 shares of its Series D Convertible Preferred
Stock, with gross proceeds of $250,000.
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.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The 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:
Registration Fees $ 1,800.00
Attorney's Fees 20,000.00
EDGAR Services 3,000.00
TOTAL $24,800.00
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 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.
Working Capital Funding
- -----------------------
Commencing May 2, 1997, the Company conducted a separate private placement
pursuant to Section 4(2) of the Securities Act of 1933, and issued 1,520,000
shares of its common stock at $1.00 per share, 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 "accredited" investors. These purchasers were existing
shareholders or were associates of such shareholders.
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. All recipients of these
shares were either sophisticated or accredited investors and all recipients
had complete access to our financial and business operations as financial
consultants, officers, directors, associates of officers and directors,
legal counsel or accountants for the Company.
<TABLE>
<CAPTION>
Description Date Shares Identity
- ----------- ---- ------ --------
<S> <C> <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 3,005,533
restricted shares pursuant to Section 4(2) of the Act. Of these four stock
option agreements 3,045,533 have expiration dates in April 2002 and 40,000
in September 2002. All options have an exercise price of $1.00
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 in financial matters. 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. Mr. Hanson was an
existing shareholder and qualified as an accredited investor.
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 1,531,685
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
issuance of these shares by the Company was pursuant to the exemption
provided in Section 4(2) of the Securities Act of 1933. The proceeds from
this private sale 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
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 December 29, 1998, 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.
FISCAL YEAR 1999
Working Capital Funding
- -----------------------
On March 9, 1999, the Company closed a Regulation D, Rule 506, private sale
of 100,000 shares of Series D Convertible Preferred Stock with three
institutional investors, having an aggregate value of $1,000,000 for the
convertible preferred and the potential for an additional $296,000,
resulting from the exercise of 100,000 Warrants attached to such stock.
These Warrants expire three years after issue and have an exercise price of
$2.96. In the first completed phase of this offering, the Company raised
$500,000 in connection with its issue of 50,000 shares of the Series D
Convertible Preferred Stock, at a price of $10.00 per share, and issued
50,000 Warrants to the three investors. In addition, the Company issued
3,500 shares of Series D Convertible Preferred Stock and 50,000 Warrants for
placement fees. In phase two of this offering, the Company exercised its
rights under the offering's Subscription Agreement to receive an additional
$250,000 in connection with the issue of 25,000 shares of Series D
Convertible Preferred Stock and 25,000 Warrants, upon the filing this
"shelf" registration statement utilizing Form SB-2, with respect to the
resale of the common stock underlying the Series D Convertible Preferred
shares. The Company filed the SB-2 on or about April 16, 1999. In phase
three of the offering, a final 25,000 shares of Series D Convertible
Preferred stock and 25,000 Warrants will be issued for an additional
$250,000, upon the effective date of the SB-2 registration statement.
Grant of Options
- ----------------
During June 1999, the Company issued a total of five stock options
agreements with certain non-shareholders and non-employees, who had provided
bookkeeping, research and organizational services to us, for 55,000
restricted shares pursuant to Section 4(2) of the Act. These options have
an exercise price of $1.00 per share and expire in five (5) years.
Capital Expenditure and Working Capital Funding
- -----------------------------------------------
In June 21, 1999, the Company commenced its offering of 1,000,000 shares of
Series E Convertible Preferred Stock, pursuant to Regulation D, Rule 506.
This offering, which is limited to "accredited investors," provides for a
minimum of 10 Units and a maximum of 100 Units, at a purchase price of
$25,000 per Unit. Each Unit consists of (i) 10,000 shares of the Company's
Series E Preferred Stock, $.001 par value per share and $2.50 per share
stated value and (ii) a warrant to purchase 5,000 shares of the Company's
common stock, $.001 par value per share. The Preferred Stock is non-voting,
convertible into shares of common stock, and bears a cumulative, non-
compounded dividend at the rate of six percent (6%) of the stated value per
annum, payable upon conversion of the Preferred Stock in cash or, at the
Company's option, in shares of common stock. The Warrants are exercisable at
a price of $3.00 per share at any time for a period of two years from the
date of issuance. This funding is earmarked for the purchase of new dairy
equipment, expenses in the expansion and development of product base,
expenses associated with a new marketing campaign, and general working
capital. As of the date of this amended SB-2 registration statement, no
shares of the Series E Convertible Preferred Stock have been issued.
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 10-SB, First Amendment, pursuant to item 601 of Regulation S-
B.
SEC
Exhibit Reference
No. No. Title of Document Location
- ------- --------- ----------------- --------
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
4.1 *Preferred, Series D Designation Ex-1
4.2 * Preferred, Series E Designation Ex-10
5.1 *Legal opinion of Stibel & Toulan LLP Ex-17
5 10 Material Contracts
Green Food Joint Venture Contract
6 10 Material Contracts
Hangzhou Meilijian Joint
Venture Contract
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
23.1 *Consent of BDO Seidman, LLP Ex-18
23.2 Consent of Stibel & Toulan LLP
(included in Exhibit 5.1)
10 27 Financial Data Schedules
11 99.1 Hangzhou Meilijian Audited Financial
Statements, Years Ending
December 31,1996, 1997 & July 30, 1998
99.2 *Subscription Agreement Ex-19
Series D Convertible Preferred
99.3 *Warrant in Connection with Ex-39
Series D Convertible Preferred
* Filed herewith
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.
(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 amended
registration statement to be signed on its behalf by the undersigned, in
the city of North Palm Beach, Florida, June 24, 1999.
(Registrant) CHINA PEREGRINE FOOD CORPORATION
By: /s/ Roy G. Warren
- ----------------------------------
Roy G. Warren, President and Chief
Executive Officer
In accordance with the requirements of the Securities Act of 1933, this
amended registration statement was signed by the following persons in the
capacities and on the dates stated.
Signature Title Date
--------- ----- ----
/S/ Charles Beech Chairman, Director June 24, 1999
/S/ Roy G. Warren President, Director June 24, 1999
/S/ Susan Lurvey Secretary, Treasurer June 24, 1999
/S/ Michael Davis Chief Financial Officer June 24, 1999
Exhibit 4.1
CERTIFICATE TO SET FORTH DESIGNATIONS, VOTING POWERS,
PREFERENCES, LIMITATIONS, RESTRICTIONS, AND RELATIVE
RIGHTS OF SERIES D 6% CUMULATIVE CONVERTIBLE
PREFERRED STOCK, $.001 PAR VALUE PER SHARE
It is hereby certified that:
I. The name of the corporation is China Peregrine Food Corporation
(the "Corporation"), a Delaware corporation.
II. Set forth hereinafter is a statement of the voting powers,
preferences, limitations, restrictions, and relative rights of shares of
Series D 6% Cumulative Convertible Preferred Stock hereinafter designated
as contained in a resolution of the Board of Directors of the Corporation
pursuant to a provision of the Articles of Incorporation of the Corporation
permitting the issuance of said Series D 6% Cumulative Convertible
Preferred Stock by resolution of the Board of Directors:
Series D 6% Cumulative Convertible Preferred Stock, $.001 par value.
1. Designation: Number of Shares. The designation of said series
of Preferred Stock shall be Series D 6% Cumulative Convertible Preferred
Stock (the "Series D Preferred Stock"). The number of shares of Series D
Preferred Stock shall be 115,000. Each share of Series D Preferred Stock
shall have a stated value equal to $10 (as adjusted for any stock
dividends, combinations or splits with respect to such shares) (the "Stated
Value"), and a par value of $0.001 per Series D Preferred Share.
2. Dividends.
(a) The Holders of outstanding shares of Series D Preferred
Stock shall be entitled to receive preferential dividends in cash out
of any funds of the Corporation legally available at the time for
declaration of dividends before any dividend or other distribution
will be paid or declared and set apart for payment on any shares of
any Common Stock, Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock, or other class of stock presently
authorized or to be authorized (the Common Stock, Series A Preferred
Stock, Series B Preferred Stock, Series C Preferred Stock, and such
other stock being hereinafter collectively the "Junior Stock") at the
rate of 6% simple interest per annum on the Stated Value per share
payable quarterly commencing with the quarter ending June 30, 1999
when as and if declared; provided however that dividend payments will
be made in additional fully paid and non assessable shares of Series
D Preferred Stock at a rate of one share of Series D Preferred Stock
for each $10 of such dividend not paid in cash, and the issuance of
such additional shares shall constitute full payment of such
dividend. Dividends may be paid at the Company's option with Series D
Preferred Stock only if the Common Stock deliverable upon conversion
of such Series D Preferred Stock will have been included for public
resale in an effective registration statement filed with the
Securities and Exchange Commission on the dates such dividends are
payable and paid to the Holder, otherwise the dividend will be paid
in cash.
(b) The dividends on the Series D Preferred Stock at the
rates provided above shall be cumulative whether or not earned so
that if at any time full cumulative dividends at the rate aforesaid
on all shares of the Series D Preferred Stock then outstanding from
the date from and after which dividends thereon are cumulative to the
end of the quarterly dividend period next preceding such time shall
not have been paid or declared and set apart for payment, or if the
full dividend on all such outstanding Series D Preferred Stock for
the then current dividend period shall not have been paid or declared
and set apart for payment, the amount of the deficiency shall be paid
or declared and set apart for payment (but without interest thereon)
before any sum shall be set apart for or applied by the Corporation
or a subsidiary of the Corporation to the purchase, redemption or
other acquisition of the Series D Preferred Stock or any shares of
any other class of stock ranking on a parity with the Series D
Preferred Stock ("Parity Stock") and before any dividend or other
distribution shall be paid or declared and set apart for payment on
any Junior Stock and before any sum shall be set aside for or applied
to the purchase, redemption or other acquisition of Junior Stock.
(c) Dividends on all shares of the Series D Preferred Stock
shall begin to accrue and be cumulative from and after the date of
issuance thereof. A dividend period shall be deemed to commence on
the day following a quarterly dividend payment date herein specified
and to end on the next succeeding quarterly dividend payment date
herein specified.
3. Liquidation Rights.
(a) Upon the dissolution, liquidation or winding-up of the
Corporation, whether voluntary or involuntary, the Holders of the
Series D Preferred Stock shall be entitled to receive before any
payment or distribution shall be made on the Junior Stock
(specifically including, without limitation, Series A Preferred
Stock, Series B Preferred Stock, and Series C Preferred Stock, out of
the assets of the Corporation available for distribution to
stockholders, the Stated Value per share of Series D Preferred Stock
and all accrued and unpaid dividends to and including the date of
payment thereof. Upon the payment in full of all amounts due to
Holders of the Series D Preferred Stock the Holders of the Common
Stock of the Corporation and any other class of Junior Stock shall
receive all remaining assets of the Corporation legally available for
distribution. If the assets of the Corporation available for
distribution to the Holders of the Series D Preferred Stock shall be
insufficient to permit payment in full of the amounts payable as
aforesaid to the Holders of Series D Preferred Stock upon such
liquidation, dissolution or winding-up, whether voluntary or
involuntary, then all such assets of the Corporation shall be
distributed to the exclusion of the Holders of shares of Junior Stock
ratably among the Holders of the Series D Preferred Stock.
(b) Neither the purchase nor the redemption by the
Corporation of shares of any class of stock nor the merger or
consolidation of the Corporation with or into any other corporation
or corporations nor the sale or transfer by the Corporation of all or
any part of its assets shall be deemed to be a liquidation,
dissolution or winding-up of the Corporation for the purposes of this
paragraph 3.
4. Conversion into Common Stock. Shares of Series D Preferred
Stock shall have the following conversion rights and obligations:
(a) Subject to the further provisions of this paragraph 4
each Holder of shares of Series D Preferred Stock shall have the
right at any time commencing on the earlier of 91 days after the
filing of this Certificate of Designation with the Office of the
Secretary of State of Delaware, or the effective date of a
registration statement described in Section 10.1(iv) of the
Subscription Agreement entered into by the Corporation and Holder (or
Holder's predecessor) relating to the Series D Preferred Stock
("Subscription Agreement"), to convert such shares into fully paid
and non-assessable shares of Common Stock of the Corporation (as
defined in paragraph 4(i) below) determined in accordance with the
Conversion Price provided in paragraph 4(b) below (the "Conversion
Price"); provided, that the aggregate Stated Value to be converted
shall be at least $10,000 (unless if at the time of such conversion
the aggregate Stated Value of all shares of Series D Preferred Stock
registered to the Holder is less than $10,000, then the whole amount
may be converted). All issued or accrued but unpaid dividends may be
converted at the election of the Holder simultaneously with the
conversion of principal amount of Stated Value of Series D Preferred
Stock being converted.
(b) 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
lesser of: (i) 100% of the average of the Closing Bid Price of the
Corporation'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) at 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
(Lookback Period"). The Closing Bid Price shall mean the closing bid
price of the Corporation's Common Stock as reported by the NASD OTC
Bulletin Board or the principal exchange or market where traded.
(c) The Holder of any certificate for shares of Series D
Preferred Stock desiring to convert any of such shares may give
notice of its decision to convert the shares into common stock by
delivering or telecopying an executed and completed notice of
conversion to the Corporation or the Corporation's Transfer Agent and
delivering within three business days thereafter, the original notice
of conversion and the certificate for the Preferred Stock properly
endorsed for or accompanied by duly executed instruments of transfer
(and such other transfer papers as said Transfer Agent may reasonably
require) to the Corporation or the Corporation's Transfer Agent. Each
date on which a notice of conversion is delivered or telecopied to
the Corporation or the Corporation's Transfer Agent in accordance
with the provisions hereof shall be deemed a Conversion Date. A form
of Notice of Conversion that may be employed by a Holder is annexed
hereto as Exhibit A. The Corporation will transmit the certificates
representing the shares of common stock issuable upon conversion of
any Series D Preferred Stock (together with the Series D Preferred
Stock representing the shares not converted) to the Holder via
express courier, by electronic transfer or otherwise, within three
business days after receipt by the Corporation of the original notice
of conversion and the Series D Preferred Stock representing the
shares to be converted ("Delivery Date"). The Holder of the shares
so surrendered for conversion shall be entitled to receive on or
before the Delivery Date a certificate or certificates which shall be
expressed to be fully paid and non-assessable for the number of
shares of Common Stock to which such Holder shall be entitled upon
such conversion registered in the name of such Holder. The
Corporation is obligated to deliver to the Holder simultaneously with
the aforedescribed Common Stock, at the election of the Holder,
additional Common Stock representing the conversion at the Conversion
Price, of dividends accrued on the Series D Preferred Stock being
converted. In the case of any Series D Preferred Stock which is
converted in part only the Holder of shares of Series D Preferred
Stock shall upon delivery of the certificate or certificates
representing Common Stock also receive a new share certificate
representing the unconverted portion of the shares of Series D
Preferred Stock. Nothing herein shall be construed to give any
Holder of shares of Series D Preferred Stock surrendering the same
for conversion the right to receive any additional shares of Common
Stock or other property which results from an adjustment in
conversion rights under the provisions of paragraph (d) or (e) of
this paragraph 4 until Holders of Common Stock are entitled to
receive the shares or other property giving rise to the adjustment.
In the case of the exercise of the conversion rights set forth
in paragraph 4(a) the conversion privilege shall be deemed to have
been exercised and the shares of Common Stock issuable upon such
conversion shall be deemed to have been issued upon the date of
receipt by the Corporation or Transfer Agent of the Notice of
Conversion. The person or entity entitled to receive Common Stock
issuable upon such conversion shall, on the date such conversion
privilege is deemed to have been exercised and thereafter, be treated
for all purposes as the record Holder of such Common Stock and shall
on the same date cease to be treated for any purpose as the record
Holder of such shares of Series D Preferred Stock so converted.
Upon the conversion of any shares of Series D Preferred Stock
no adjustment or payment shall be made with respect to such converted
shares on account of any dividend on the Common Stock, except that
the Holder of such converted shares shall be entitled to be paid any
dividends declared on shares of Common Stock after conversion
thereof.
The Corporation shall not be required, in connection with any
conversion of Series D Preferred Stock, and payment of dividends on
Series D Preferred Stock to issue a fraction of a share of its Series
D Preferred Stock and shall instead deliver a stock certificate
representing the next whole number.
The Corporation and Holder may not convert that amount of the
Series D Preferred Stock on a Conversion Date in connection with that
number of shares of Common Stock which would be in excess of the sum
of (i) the number of shares of Common Stock beneficially owned by the
Subscriber and its affiliates on such Conversion Date, and (ii) the
number of shares of Common Stock issuable upon the conversion of the
Series D Preferred Stock with respect to which the determination of
this proviso is being made on such Conversion Date, which would
result in beneficial ownership by the Holder and its affiliates of
more than 9.99% of the outstanding shares of Common Stock of the
Corporation. For the purposes of the proviso to the immediately
preceding sentence, beneficial ownership shall be determined in
accordance with Section 13(d) of the Securities Exchange Act of 1934,
as amended, and Regulation 13d-3 thereunder.
(d) The Conversion Price shall be subject to adjustment from
time to time as follows:
(i) In case the Corporation shall at any time (A)
declare any dividend or distribution on its Common Stock or
other securities of the Corporation other than the Series D
Preferred Stock, (B) split or subdivide the outstanding Common
Stock, (C) combine the outstanding Common Stock into a smaller
number of shares, or (D) issue by reclassification of its
Common Stock any shares or other securities of the Corporation,
then in each such event the Conversion Price shall be adjusted
proportionately so that the Holders of Series D Preferred Stock
shall be entitled to receive the kind and number of shares or
other securities of the Corporation which such Holders would
have owned or have been entitled to receive after the happening
of any of the events described above had such shares of Series
D Preferred Stock been converted immediately prior to the
happening of such event (or any record date with respect
thereto). Such adjustment shall be made whenever any of the
events listed above shall occur. An adjustment made to the
Conversion pursuant to this paragraph 4(d)(i) shall become
effective immediately after the effective date of the event
retroactive to the record date, if any, for the event.
(e) (i) In case of any merger of the Corporation with
or into any other corporation (other than a merger in which the
Corporation is the surviving or continuing corporation and
which does not result in any reclassification, conversion, or
change of the outstanding shares of Common Stock) then unless
the right to convert shares of Series D Preferred Stock shall
have terminated, as part of such merger lawful provision shall
be made so that Holders of Series D Preferred Stock shall
thereafter have the right to convert each share of Series D
Preferred Stock into the kind and amount of shares of stock
and/or other securities or property receivable upon such merger
by a Holder of the number of shares of Common Stock into which
such shares of Series D Preferred Stock might have been
converted immediately prior to such consolidation or merger.
Such provision shall also provide for adjustments which shall
be as nearly equivalent as may be practicable to the
adjustments provided for in paragraph (d) of this paragraph 4.
The foregoing provisions of this paragraph 4(e) shall similarly
apply to successive mergers.
(ii) In case of any sale or conveyance to another person
or entity of the property of the Corporation as an entirety, or
substantially as an entirety, in connection with which shares
or other securities or cash or other property shall be
issuable, distributable, payable, or deliverable for
outstanding shares of Common Stock, then, unless the right to
convert such shares shall have terminated, lawful provision
shall be made so that the Holders of Series D Preferred Stock
shall thereafter have the right to convert each share of the
Series D Preferred Stock into the kind and amount of shares of
stock or other securities or property that shall be issuable,
distributable, payable, or deliverable upon such sale or
conveyance with respect to each share of Common Stock
immediately prior to such conveyance.
(f) Whenever the number of shares to be issued upon
conversion of the Series D Preferred Stock is required to be adjusted
as provided in this paragraph 4, the Corporation shall forthwith
compute the adjusted number of shares to be so issued and prepare a
certificate setting forth such adjusted conversion amount and the
facts upon which such adjustment is based, and such certificate shall
forthwith be filed with the Transfer Agent for the Series D Preferred
Stock and the Common Stock; and the Corporation shall mail to each
Holder of record of Series D Preferred Stock notice of such adjusted
conversion price.
(g) In case at any time the Corporation shall propose:
(i) to pay any dividend or distribution payable in
shares upon its Common Stock or make any distribution (other
than cash dividends) to the Holders of its Common Stock; or
(ii) to offer for subscription to the Holders of its
Common Stock any additional shares of any class or any other
rights; or
(iii) any capital reorganization or reclassification of
its shares or the merger of the Corporation with another
corporation (other than a merger in which the Corporation is
the surviving or continuing corporation and which does not
result in any reclassification, conversion, or change of the
outstanding shares of Common Stock); or
(iv) the voluntary dissolution, liquidation or winding-
up of the Corporation;
then, and in any one or more of said cases, the Corporation shall
cause at least fifteen (15) days prior notice of the date on which
(A) the books of the Corporation shall close or a record be taken for
such stock dividend, distribution, or subscription rights, or (B)
such capital reorganization, reclassification, merger, dissolution,
liquidation or winding-up shall take place, as the case may be, to be
mailed to the Transfer Agent for the Series D Preferred Stock and for
the Common Stock and to the Holders of record of the Series D
Preferred Stock.
(h) So long as any shares of Series D Preferred Stock shall
remain outstanding and the Holders thereof shall have the right to
convert the same in accordance with provisions of this paragraph 4
the Corporation shall at all times reserve from the authorized and
unissued shares of its Common Stock a sufficient number of shares to
provide for such conversions.
(i) The term Common Stock as used in this paragraph 4 shall
mean the $.001 par value Common Stock of the Corporation as such
stock is constituted at the date of issuance thereof or as it may
from time to time be changed or shares of stock of any class of other
securities and/or property into which the shares of Series D
Preferred Stock shall at any time become convertible pursuant to the
provisions of this paragraph 4.
(j) The Corporation shall pay the amount of any and all issue
taxes (but not income taxes) which may be imposed in respect of any
issue or delivery of stock upon the conversion of any shares of
Series D Preferred Stock, but all transfer taxes and income taxes
that may be payable in respect of any change of ownership of Series D
Preferred Stock or any rights represented thereby or of stock
receivable upon conversion thereof shall be paid by the person or
persons surrendering such stock for conversion.
(k) In the event a Holder shall elect to convert any shares
of Series D Preferred Stock as provided herein, the Corporation
cannot refuse conversion based on any claim that such Holder or any
one associated or affiliated with such Holder has been engaged in any
violation of law, unless, an injunction from a court, on notice,
restraining and or enjoining conversion of all or part of said shares
of Series D Preferred Stock shall have been issued and the
Corporation posts a surety bond for the benefit of such Holder in the
amount of 126% of the Stated Value of the Series D Preferred Stock
and dividends sought to be converted, which is subject to the
injunction, which bond shall remain in effect until the completion of
arbitration/litigation of the dispute and the proceeds of which shall
be payable to such Holder in the event it obtains judgment.
(l) In addition to any other rights available to the Holder,
if the Corporation fails to deliver to the Holder such certificate or
certificates pursuant to Section 4(c) by the Delivery Date and if
after the Delivery Date the Holder purchases (in an open market
transaction or otherwise) shares of Common Stock to deliver in
satisfaction of a sale by such Holder of the Common Stock which the
Holder anticipated receiving upon such conversion (a "Buy-In"), then
the Corporation shall pay in cash to the Holder (in addition to any
remedies available to or elected by the Holder) the amount by which
(A) the Holder's total purchase price (including brokerage
commissions, if any) for the shares of Common Stock so purchased
exceeds (B) the aggregate Stated Value of the shares of Series D
Preferred Stock for which such conversion was not timely honored,
together with interest thereon at a rate of 16% per annum, accruing
until such amount and any accrued interest thereon is paid in full
(which amount shall be paid as liquidated damages and not as a
penalty). For example, if the Holder purchases shares of Common
Stock having a total purchase price of $11,000 to cover a Buy-In with
respect to an attempted conversion of $10,000 of Stated Value of
Series D Preferred Stock, the Corporation shall be required to pay
the Holder $1,000, plus interest. The Holder shall provide the
Corporation written notice indicating the amounts payable to the
Holder in respect of the Buy-In.
5. Mandatory Conversion.
(a) The shares of Series D Preferred Stock and dividends not
previously converted into shares of Common Stock shall be converted
into shares of Common Stock without further action of the Holder on
the date that is two years from the date of issuance thereof
("Mandatory Conversion Date"), at the Conversion Price and on the
conversion terms specified in paragraph 4(b). Deliveries of Common
Stock upon Mandatory Conversion shall be made as if the Mandatory
Conversion Date were a Conversion Date.
(b) Notice of conversion of Series D Preferred Stock by the
Corporation pursuant to this paragraph 5 shall be given by mail or in
such other manner as may be prescribed by resolution of the Board not
less than thirty (30) days prior to the Mandatory Conversion Date.
As applicable, the notice shall specify the number of shares to be
converted, the date fixed for conversion, and the conversion price
per share.
(c) The Holder of any certificate for shares of Series D
Preferred Stock that is converted pursuant to this Section 5 shall
surrender such certificate at the principal office of any transfer
agent for said stock (the "Transfer Agent") properly endorsed for or
accompanied by duly executed instruments of transfer (and such other
transfer papers as said Transfer Agent may reasonably require). The
Holder of the shares so surrendered for conversion shall be entitled
to receive (except as otherwise provided herein) a certificate or
certificates which shall be expressed to be fully paid and non-
assessable for the number of shares of Common Stock to which such
Holder shall be entitled upon such conversion registered in the name
of such Holder.
(d) On and after the Mandatory Conversion Date and
notwithstanding that any certificate for shares of Series D Preferred
Stock so called for conversion shall not have been surrendered for
cancellation, all dividends on the Series D Preferred Stock called
for conversion shall cease to accrue and the shares represented
thereby shall no longer be deemed outstanding and all rights of the
Holders thereof as Holders of the Corporation shall cease and
terminate, except the right to receive the shares of Common Stock
upon conversion as provided herein.
(e) In no event shall a Mandatory Conversion occur without
the consent of the Holder of Series D Preferred Stock at any time
unless the Common Stock to be delivered upon conversion will be upon
delivery and thereafter immediately resalable, without restrictive
legend and upon such resale freely transferable on the transfer books
of the Corporation. Nor may the Corporation effect a Mandatory
Conversion without the consent of the Holder after the occurrence
(whether continuing or not) of an Event of Default as defined in
Paragraph 2 hereof.
6. Voting Rights. The shares of Series D Preferred Stock shall
not have voting rights.
7. Redemption. From and after 40 days after the Effective Date of
the Registration Statement as defined in Section 10.1(iv) of the
Subscription Agreement, the Corporation will have the option of redeeming
the Series D Preferred Stock ("Optional Redemption") 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 ("Notice of Redemption) is given to a Holder
("Redemption Date") 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 be in effect on the Redemption Date
("Redemption Amount") 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. A Notice of Redemption may not be given in
connection with any Series D Preferred Stock for which notice of conversion
has been given by the Holder either before or after receipt by the Holder
of a Notice of Redemption except that after receipt by the Holder of a
Notice of Redemption the Holder may elect by giving written notice to the
Corporation within two (2) business days of a Redemption Date to convert no
more than twenty (20%) percent of the Series D Preferred Stock noticed in
the Notice of Redemption. A Notice of Redemption must be accompanied by a
certificate signed by the chief executive officer or chief financial
officer of the Corporation stating that the Corporation has on deposit and
segregated ready funds equal to the Redemption Amount. The Redemption
Amount (less any amount that may be converted by a Holder) must be paid in
good funds to the Holder no later than the fifth business day after the
Redemption Date. In the event the Corporation fails to pay the Redemption
Amount by such date, then the Redemption Notice will be null and void and
the Corporation will thereafter have no further right to effect an Optional
Redemption. Any Notice of Redemption must be given to all Holders of
Series D Preferred Stock in proportion to their holdings of Series D
Preferred Stock on a Redemption Date. The minimum Redemption Amount must
be no less than the sum that would be realized by the Holder on the
Redemption Date of a sale of the amount of Common Stock receivable upon
conversion of the amount of Series D Preferred Stock being redeemed plus
the dollar amount of accrued dividends on the Series D Preferred Stock
being redeemed 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.
8. Event of Default. The occurrence of any of the following
events of default ("Event of Default") shall, after the applicable period
to cure the Event of Default, cause the dividend rate of 6% described in
paragraph 2 hereof to become 12% from and after the occurrence of such
event, and the Holder shall have the option to require the Corporation to
redeem the Series D Preferred Stock held by such Holder by the immediate
payment to the Holder by the Corporation of a sum of money equal to the
number of shares that would be issuable upon conversion of an amount of
Stated Valued and accrued dividends designated by the Holder, at the
Conversion Price in effect as of the trading day prior to the date notice
is given to the Corporation multiplied by the average closing ask price of
the Corporation's Common Stock on such date:
(a) The Corporation fails to pay any dividend payment
required to be paid pursuant to the terms of paragraph 2 hereof or
the failure to timely pay any other sum of money due to the Holder
from the Company and such failure continues for a period of ten (10)
days after written notice to the Corporation from the Holder.
(b) The Corporation breaches any material covenant, term or
condition of the Subscription Agreement entered into between the
Corporation and Holder relating to Series D Preferred Stock or in
this Certificate of Designation, and such breach continues for a
period of seven (7) days after written notice to the Corporation from
the Holder.
(c) Any material representation or warranty of the
Corporation made in the Subscription Agreement, or in any agreement,
statement or certificate given in writing pursuant thereto shall be
false or misleading.
(d) The Corporation shall make an assignment of a substantial
part of its property or business for the benefit of creditors, or
apply for or consent to the appointment of a receiver or trustee for
it or for a substantial part of its property or business, or such a
receiver or trustee shall otherwise be appointed.
(e) Any money judgment, confession of judgment, writ or
similar process shall be entered against the Corporation or its
property or other assets for more than $100,000, and is not vacated,
satisfied, bonded or stayed within 45 days.
(f) Bankruptcy, insolvency, reorganization or liquidation
proceedings or other proceedings or relief under any bankruptcy law
or any law for the relief of debtors shall be instituted by or
against the Corporation.
(g) The failure to maintain a listing of the Common Stock on
the NASD OTC Bulletin Board (or successor market, if any).
(h) An order entered by a court of competent jurisdiction, or
by the Securities and Exchange Commission, or by the National
Association of Securities Dealers, preventing purchase and sale
transactions in the Corporation's Common Stock.
(i) The Corporation's failure to timely deliver Common Stock
to the Holder pursuant to paragraph 4 hereof or the Subscription
Agreement.
(j) The occurrence of a Non-Registration Event as described
in Section 10.4 of the Subscription Agreement.
9. Status of Converted or Redeemed Stock. In case any shares of
Series D Preferred Stock shall be redeemed or otherwise repurchased or
reacquired, the shares so redeemed, converted, or reacquired shall resume
the status of authorized but unissued shares of Preferred Stock and shall
no longer be designated as Series D Preferred Stock.
10. Additional Restrictions. Until 180 days after the Effective
Date, as defined in Section 10.1(iv) of the Subscription Agreement and
provided that shares of the Series D Preferred Stock are then outstanding,
the Corporation will not issue any preferred stock that will be senior to
the Series D Preferred Stock except that the Corporation may issue such
preferred stock provided such preferred stock is not senior to the Series D
Preferred Stock during the 180 day period commencing on the Effective Date
of the above described Registration Statement. For so long as any shares
of Series D Preferred Stock are outstanding, the Corporation will not amend
the terms of any outstanding class of Preferred Stock of the Company, and
will not amend the terms of the Series D Preferred Stock without the
written consent of the Holder of the Series D Preferred Stock.
CHINA PEREGRINE FOOD CORPORATION
Dated: March 8, 1999 By: /s/ Roy G. Warren
------------------------------
Roy G. Warren, President
EXHIBIT A
NOTICE OF CONVERSION
(To Be Executed By the Registered Holder in Order to Convert the Series D
Convertible Preferred Stock of China Peregrine Food Corporation)
The undersigned hereby irrevocably elects to convert $______________
of the Stated Value of the above Series D Convertible Preferred Stock into
shares of Common Stock of China Peregrine Food Corporation (the
"Corporation") according to the conditions hereof, as of the date written
below.
Date of Conversion:________________________________________________
Applicable Conversion Price Per Share:_____________________________
Conversion Price Calculated Pursuant to:
Section 4(b)(i):_________________ or 4(b)(ii)_________________
If pursuant to 4(b)(ii), the three dates and closing prices employed are:
(1)_____________/$______________ (2)____________/$____________
(3)______________$______________
Number of Common Shares Issuable Upon This Conversion:_____________
Signature:_________________________________________________________
Print Name:________________________________________________________
Address:___________________________________________________________
___________________________________________________________________
Deliveries Pursuant to this Notice of Conversion Should Be Made to:
___________________________________________________________________
___________________________________________________________________
Exhibit 4.2
CERTIFICATE TO SET FORTH DESIGNATIONS, VOTING POWERS,
PREFERENCES, LIMITATIONS, RESTRICTIONS, AND RELATIVE
RIGHTS OF SERIES E 6% CUMULATIVE CONVERTIBLE
PREFERRED STOCK, $.001 PAR VALUE PER SHARE
It is hereby certified that:
I. The name of the corporation is China Peregrine Food Corporation
(the "Corporation"), a Delaware corporation.
II. Set forth hereinafter is a statement of the voting powers,
preferences, limitations, restrictions, and relative rights of shares of
Series E 6% Cumulative Convertible Preferred Stock hereinafter designated
as contained in a resolution of the Board of Directors of the Corporation
pursuant to a provision of the Articles of Incorporation of the Corporation
permitting the issuance of said Series E 6% Cumulative Convertible
Preferred Stock by resolution of the Board of Directors:
Series E 6% Cumulative Convertible Preferred Stock, $.001 par value.
1. Designation: Number of Shares. The designation of said series
of Preferred Stock shall be Series E 6% Cumulative Convertible Preferred
Stock (the "Series E Preferred Stock"). The number of shares of Series E
Preferred Stock shall be 1,500,000. Each share of Series E Preferred Stock
shall have a stated value equal to $2.50 (as adjusted for any stock
dividends, combinations or splits with respect to such shares) (the "Stated
Value"), and a par value of $0.001 per Series E Preferred Share.
2. Dividends.
(a) The Holders of outstanding shares of Series E Preferred
Stock shall be entitled to receive dividends in cash out of any funds
of the Corporation legally available at the time for declaration of
dividends before any dividend or other distribution paid or declared
and set apart for payment on any shares of Common Stock ("Junior
Stock"), and in pari passu with any dividend or other distribution
paid or declared and set apart for payment on any shares of any
Series A Preferred Stock, Series B Preferred Stock, and Series C
Preferred Stock ("Parity Stock"), but subordinate to the payment or
declaration of any dividends or other distributions to the holders of
Series D Preferred Stock, at the rate of 6% simple interest per annum
on the Stated Value per share payable at the conversion of the Series
E Preferred Stock to the Common Stock of the Corporation (the
"Dividend Payment Date"), as provided herein; provided however that,
at the option of the Corporation, dividend payments may be made in
fully paid and non assessable shares of Common Stock of the
Corporation at a rate determined by the Conversion Price as set forth
in and pursuant to the provisions of paragraph 4(b) herein, and the
issuance of such additional shares shall constitute full payment of
such dividends.
(b) The dividends on the Series E Preferred Stock at the
rates provided above shall be cumulative whether or not earned so
that if at any time full cumulative dividends at the rate aforesaid
on all shares of the Series E Preferred Stock then outstanding from
the date from and after which dividends thereon are cumulative until
paid. If, on the Dividend Payment Date, the dividends are not paid
in full in cash or in Common Stock, the amount of the deficiency
shall be paid or declared and set apart for payment (but without
interest thereon) before any sum shall be set apart for or applied by
the Corporation or a subsidiary of the Corporation to the purchase,
redemption or other acquisition of the Series E Preferred Stock or
any shares of Parity Stock and before any dividend or other
distribution shall be paid or declared and set apart for payment on
any Junior Stock and before any sum shall be set aside for or applied
to the purchase, redemption or other acquisition of Junior Stock, but
subordinate to the rights of the holders of the Series D Preferred
Stock.
(c) Dividends on all shares of the Series E Preferred Stock
shall begin to accrue and be cumulative from and after the date of
issuance thereof.
3. Liquidation Rights.
(a) Upon the dissolution, liquidation or winding-up of the
Corporation, whether voluntary or involuntary, the Holders of the
Series E Preferred Stock shall be entitled to receive before any
payment or distribution shall be made on the Junior Stock and in pari
passu with the Parity Stock, but subordinate to the Series D
Preferred Stock, out of the assets of the Corporation available for
distribution to stockholders, the Stated Value per share of Series E
Preferred Stock and all accrued and unpaid dividends to and including
the date of payment thereof. Upon the payment in full of all amounts
due to Holders of the Series E Preferred Stock the Holders of the
Common Stock of the Corporation and any other class of Junior Stock
shall receive all remaining assets of the Corporation legally
available for distribution. If the assets of the Corporation
available for distribution to the Holders of the Series E Preferred
Stock shall be insufficient to permit payment in full of the amounts
payable as aforesaid to the Holders of Series E Preferred Stock upon
such liquidation, dissolution or winding-up, whether voluntary or
involuntary, then all such assets of the Corporation shall be
distributed to the exclusion of the Holders of shares of Junior Stock
ratably among the Holders of the Series E Preferred Stock, subject
always to the rights of the holders of the series D Preferred Stock.
(b) Neither the purchase nor the redemption by the
Corporation of shares of any class of stock nor the merger or
consolidation of the Corporation with or into any other corporation
or corporations nor the sale or transfer by the Corporation of all or
any part of its assets shall be deemed to be a liquidation,
dissolution or winding-up of the Corporation for the purposes of this
paragraph 3.
4. Conversion into Common Stock. Shares of Series E Preferred
Stock shall have the following conversion rights and obligations:
(a) Subject to the further provisions of this paragraph 4
each Holder of shares of Series E Preferred Stock shall have the
right at any time commencing on the issuance thereof to convert such
shares into fully paid and non-assessable shares of Common Stock of
the Corporation (as defined in paragraph 4(i) below) determined in
accordance with the Conversion Price provided in paragraph 4(b) below
(the "Conversion Price"); provided, that the aggregate Stated Value
to be converted shall be at least $10,000 (unless if at the time of
such conversion the aggregate Stated Value of all shares of Series E
Preferred Stock registered to the Holder is less than $10,000, then
the whole amount may be converted). All dividends paid in Common
Stock may be converted at the election of the Holder simultaneously
with the conversion of principal amount of Stated Value of Series E
Preferred Stock being converted.
(b) The number of shares of Common Stock issuable upon
conversion of each share of Series E 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
greater of: (i) $2.00 per Common Stock share; or (ii) 80% of the
average Closing Bid Prices for the five (5) trading days immediately
preceding the date on which the Corporation receives a conversion
notice for the respective shares of Series E Preferred Stock (the
"Lookback Period"), provided, that the Conversion Price will in no
event be greater than $3.00 per Common Stock share. The Closing Bid
Price shall mean the closing bid price of the Corporation's Common
Stock as reported by the NASD OTC Bulletin Board or the principal
exchange or market where traded.
(c) The Holder of any certificate for shares of Series E
Preferred Stock desiring to convert any of such shares may give
notice of its decision to convert the shares into common stock by
delivering or telecopying an executed and completed notice of
conversion to the Corporation at its corporate offices and delivering
within three business days thereafter, the original notice of
conversion and the certificate for the Preferred Stock properly
endorsed for or accompanied by duly executed instruments of transfer
(and such other transfer papers as said Transfer Agent may reasonably
require) to the Corporation or the Corporation's Transfer Agent. Each
date on which a notice of conversion is delivered or telecopied to
the Corporation in accordance with the provisions hereof shall be
deemed a Conversion Date. A form of Notice of Conversion that may be
employed by a Holder is annexed hereto as Exhibit A. The Corporation
will transmit the certificates representing the shares of common
stock issuable upon conversion of any Series E Preferred Stock
(together with the Series E Preferred Stock representing the shares
not converted) to the Holder via express courier, by electronic
transfer or otherwise, within five (5) business days after receipt by
the Corporation of the original notice of conversion and the Series E
Preferred Stock representing the shares to be converted ("Delivery
Date"). The Holder of the shares so surrendered for conversion shall
be entitled to receive on or before the Delivery Date a certificate
or certificates which shall be expressed to be fully paid and non-
assessable for the number of shares of Common Stock to which such
Holder shall be entitled upon such conversion registered in the name
of such Holder. The Corporation is obligated to deliver to the
Holder simultaneously with the aforedescribed Common Stock, at the
election of the Holder, additional Common Stock representing the
conversion at the Conversion Price, of dividends accrued on the
Series E Preferred Stock being converted. In the case of any Series
E Preferred Stock which is converted in part only the Holder of
shares of Series E Preferred Stock shall upon delivery of the
certificate or certificates representing Common Stock also receive a
new share certificate representing the unconverted portion of the
shares of Series E Preferred Stock. Nothing herein shall be
construed to give any Holder of shares of Series E Preferred Stock
surrendering the same for conversion the right to receive any
additional shares of Common Stock or other property which results
from an adjustment in conversion rights under the provisions of
paragraph (d) or (e) of this paragraph 4 until Holders of Common
Stock are entitled to receive the shares or other property giving
rise to the adjustment.
In the case of the exercise of the conversion rights set forth
in paragraph 4(a) the conversion privilege shall be deemed to have
been exercised and the shares of Common Stock issuable upon such
conversion shall be deemed to have been issued upon the date of
receipt by the Corporation of the Notice of Conversion. The person
or entity entitled to receive Common Stock issuable upon such
conversion shall, on the date such conversion privilege is deemed to
have been exercised and thereafter, be treated for all purposes as
the record Holder of such Common Stock and shall on the same date
cease to be treated for any purpose as the record Holder of such
shares of Series E Preferred Stock so converted.
Upon the conversion of any shares of Series E Preferred Stock
no adjustment or payment shall be made with respect to such
converted shares on account of any dividend on the Common Stock,
except that the Holder of such converted shares shall be entitled to
be paid any dividends declared on shares of Common Stock after
conversion thereof.
The Corporation shall not be required, in connection with any
conversion of Series E Preferred Stock, and payment of dividends on
Series E Preferred Stock to issue a fraction of a share of its Series
E Preferred Stock and shall instead deliver a stock certificate
representing the next whole number.
(d) The Conversion Price shall be subject to adjustment from
time to time as follows:
(i) In case the Corporation shall at any time (A)
declare any dividend or distribution on its Common Stock or
other securities of the Corporation other than the Series E
Preferred Stock, (B) split or subdivide the outstanding Common
Stock, (C) combine the outstanding Common Stock into a smaller
number of shares, or (D) issue by reclassification of its
Common Stock any shares or other securities of the Corporation,
then in each such event the Conversion Price shall be adjusted
proportionately so that the Holders of Series E Preferred Stock
shall be entitled to receive the kind and number of shares or
other securities of the Corporation which such Holders would
have owned or have been entitled to receive after the happening
of any of the events described above had such shares of Series
E Preferred Stock been converted immediately prior to the
happening of such event (or any record date with respect
thereto). Such adjustment shall be made whenever any of the
events listed above shall occur. An adjustment made to the
Conversion Price pursuant to this paragraph 4(d)(i) shall
become effective immediately after the effective date of the
event retroactive to the record date, if any, for the event.
(e) (i) In case of any merger of the Corporation with
or into any other corporation (other than a merger in which the
Corporation is the surviving or continuing corporation and
which does not result in any reclassification, conversion, or
change of the outstanding shares of Common Stock) then unless
the right to convert shares of Series E Preferred Stock shall
have terminated, as part of such merger lawful provision shall
be made so that Holders of Series E Preferred Stock shall
thereafter have the right to convert each share of Series E
Preferred Stock into the kind and amount of shares of stock
and/or other securities or property receivable upon such merger
by a Holder of the number of shares of Common Stock into which
such shares of Series E Preferred Stock might have been
converted immediately prior to such consolidation or merger.
Such provision shall also provide for adjustments which shall
be as nearly equivalent as may be practicable to the
adjustments provided for in paragraph (d) of this paragraph 4.
The foregoing provisions of this paragraph 4(e) shall similarly
apply to successive mergers.
(ii) In case of any sale or conveyance to another person
or entity of the property of the Corporation as an entirety, or
substantially as an entirety, in connection with which shares
or other securities or cash or other property shall be
issuable, distributable, payable, or deliverable for
outstanding shares of Common Stock, then, unless the right to
convert such shares shall have terminated, lawful provision
shall be made so that the Holders of Series E Preferred Stock
shall thereafter have the right to convert each share of the
Series E Preferred Stock into the kind and amount of shares of
stock or other securities or property that shall be issuable,
distributable, payable, or deliverable upon such sale or
conveyance with respect to each share of Common Stock
immediately prior to such conveyance.
(f) Whenever the number of shares to be issued upon
conversion of the Series E Preferred Stock is required to be adjusted
as provided in this paragraph 4, the Corporation shall forthwith
compute the adjusted number of shares to be so issued and prepare a
certificate setting forth such adjusted conversion amount and the
facts upon which such adjustment is based, and such certificate shall
forthwith be filed with the Transfer Agent for the Series E Preferred
Stock and the Common Stock; and the Corporation shall mail to each
Holder of record of Series E Preferred Stock notice of such adjusted
conversion price.
(g) In case at any time the Corporation shall propose:
(i) to pay any dividend or distribution payable in
shares upon its Common Stock or make any distribution (other
than cash dividends) to the Holders of its Common Stock; or
(ii) to offer for subscription to the Holders of its
Common Stock any additional shares of any class or any other
rights; or
(iii) any capital reorganization or reclassification of
its shares or the merger of the Corporation with another
corporation (other than a merger in which the Corporation is
the surviving or continuing corporation and which does not
result in any reclassification, conversion, or change of the
outstanding shares of Common Stock); or
(iv) the voluntary dissolution, liquidation or winding-
up of the Corporation;
then, and in any one or more of said cases, the Corporation shall
cause at least fifteen (15) days prior notice of the date on which
(A) the books of the Corporation shall close or a record be taken for
such stock dividend, distribution, or subscription rights, or (B)
such capital reorganization, reclassification, merger, dissolution,
liquidation or winding-up shall take place, as the case may be, to be
mailed to the Transfer Agent for the Series E Preferred Stock and for
the Common Stock and to the Holders of record of the Series E
Preferred Stock.
(h) So long as any shares of Series E Preferred Stock shall
remain outstanding and the Holders thereof shall have the right to
convert the same in accordance with provisions of this paragraph 4
the Corporation shall at all times reserve from the authorized and
unissued shares of its Common Stock a sufficient number of shares to
provide for such conversions.
(i) The term Common Stock as used in this paragraph 4 shall
mean the $.001 par value Common Stock of the Corporation as such
stock is constituted at the date of issuance thereof or as it may
from time to time be changed or shares of stock of any class of other
securities and/or property into which the shares of Series E
Preferred Stock shall at any time become convertible pursuant to the
provisions of this paragraph 4.
(j) The Corporation shall pay the amount of any and all issue
taxes (but not income taxes) which may be imposed in respect of any
issue or delivery of stock upon the conversion of any shares of
Series E Preferred Stock, but all transfer taxes and income taxes
that may be payable in respect of any change of ownership of Series E
Preferred Stock or any rights represented thereby or of stock
receivable upon conversion thereof shall be paid by the person or
persons surrendering such stock for conversion.
(k) In the event a Holder shall elect to convert any shares
of Series E Preferred Stock as provided herein, the Corporation
cannot refuse conversion based on any claim that such Holder or any
one associated or affiliated with such Holder has been engaged in any
violation of law, unless, an injunction from a court, on notice,
restraining and or enjoining conversion of all or part of said shares
of Series E Preferred Stock shall have been issued and the
Corporation posts a surety bond for the benefit of such Holder in the
amount of 126% of the Stated Value of the Series E Preferred Stock
and dividends sought to be converted, which is subject to the
injunction, which bond shall remain in effect until the completion of
arbitration/litigation of the dispute and the proceeds of which shall
be payable to such Holder in the event it obtains judgment.
5. Automatic Conversion.
(a) At the option of the Corporation, the shares of Series E
Preferred Stock and dividends not previously converted into shares of
Common Stock shall be converted into shares of Common Stock at the
Conversion Price without further action of the Holder provided (i)
the shares of Common Stock issuable upon conversion of the Preferred
Stock have been registered under the Securities Act, and (ii) the
Common Stock has traded at or above $9.00 per share for thirty (30)
consecutive trading days, ending within ten (10) days of the notice
of the Automatic Conversion as provided herein.
(b) Notice of the Automatic Conversion of Series E Preferred
Stock by the Corporation pursuant to this paragraph 5 shall be given
by first class mail, return receipt requested, not less than thirty
(30) days prior to the date fixed by the Corporation for the
Automatic Conversion (the "Automatic Conversion Date"). As
applicable, the notice shall specify the number of shares to be
converted, the date fixed for conversion, and the Conversion Price
per share, as provided in paragraph 4(b) herein.
(c) The Holder of any certificate for shares of Series E
Preferred Stock that is converted pursuant to this Section 5 shall
surrender such certificate at the principal office of any transfer
agent for said stock (the "Transfer Agent") properly endorsed for or
accompanied by duly executed instruments of transfer (and such other
transfer papers as said Transfer Agent may reasonably require). The
Holder of the shares so surrendered for conversion shall be entitled
to receive (except as otherwise provided herein) a certificate or
certificates which shall be expressed to be fully paid and non-
assessable for the number of shares of Common Stock to which such
Holder shall be entitled upon such conversion registered in the name
of such Holder.
(d) On and after the Automatic Conversion Date and
notwithstanding that any certificate for shares of Series E Preferred
Stock so called for conversion shall not have been surrendered for
cancellation, all dividends on the Series E Preferred Stock called
for conversion shall cease to accrue and the shares represented
thereby shall no longer be deemed outstanding and all rights of the
Holders thereof as Holders of the Corporation shall cease and
terminate, except the right to receive the shares of Common Stock
upon conversion as provided herein.
(e) In no event shall an Automatic Conversion occur without
the consent of the Holder of Series E Preferred Stock at any time
unless the Common Stock to be delivered upon conversion will be upon
delivery and thereafter immediately resalable, without restrictive
legend and upon such resale freely transferable on the transfer books
of the Corporation.
6. Voting Rights. The shares of Series E Preferred Stock shall
not have voting rights.
7. Event of Default. The occurrence of any of the following
events of default ("Event of Default") shall, after the applicable period
to cure the Event of Default, cause the dividend rate of 6% described in
paragraph 2 hereof to become 12% from and after the occurrence of such
event, and the Holder shall have the option to require the Corporation to
redeem the Series E Preferred Stock held by such Holder by the immediate
payment to the Holder by the Corporation of a sum of money equal to the
number of shares that would be issuable upon conversion of an amount of
Stated Valued and accrued dividends designated by the Holder, at the
Conversion Price in effect as of the trading day prior to the date notice
is given to the Corporation multiplied by the average closing ask price of
the Corporation's Common Stock on such date:
(a) The Corporation fails to pay any dividend payment
required to be paid pursuant to the terms of paragraph 2 hereof or
the failure to timely pay any other sum of money due to the Holder
from the Company and such failure continues for a period of ten (10)
days after written notice to the Corporation from the Holder.
(b) The Corporation breaches any material covenant, term or
condition of the Subscription Agreement entered into between the
Corporation and Holder relating to Series E Preferred Stock or in
this Certificate of Designation, and such breach continues for a
period of seven (7) days after written notice to the Corporation from
the Holder.
(c) Any material representation or warranty of the
Corporation made in this Certificate of Designation shall be false or
misleading.
(d) The Corporation shall make an assignment of a substantial
part of its property or business for the benefit of creditors, or
apply for or consent to the appointment of a receiver or trustee for
it or for a substantial part of its property or business, or such a
receiver or trustee shall otherwise be appointed.
(e) Any money judgment, confession of judgment, writ or
similar process shall be entered against the Corporation or its
property or other assets for more than $500,000, and is not vacated,
satisfied, bonded or stayed within 45 days.
(f) Bankruptcy, insolvency, reorganization or liquidation
proceedings or other proceedings or relief under any bankruptcy law
or any law for the relief of debtors shall be instituted by or
against the Corporation.
(g) The failure to maintain a listing of the Common Stock on
the NASD OTC Bulletin Board (or successor market, if any).
(h) An order entered by a court of competent jurisdiction, or
by the Securities and Exchange Commission, or by the National
Association of Securities Dealers, preventing purchase and sale
transactions in the Corporation's Common Stock.
(i) The Corporation's failure to timely deliver Common Stock
to the Holder pursuant to paragraph 4 hereof.
8. Status of Converted or Redeemed Stock. In case any shares of
Series E Preferred Stock shall be redeemed or otherwise repurchased or
reacquired, the shares so redeemed, converted, or reacquired shall resume
the status of authorized but unissued shares of Preferred Stock and shall
no longer be designated as Series E Preferred Stock.
CHINA PEREGRINE FOOD CORPORATION
Dated: June 24, 1999 By:_____________________________
Roy G. Warren, President
EXHIBIT A
NOTICE OF CONVERSION
(To Be Executed By the Registered Holder in Order to Convert the Series E
Convertible Preferred Stock of China Peregrine Food Corporation)
The undersigned hereby irrevocably elects to convert $______________ of the
Stated Value of the above Series E Convertible Preferred Stock into shares
of Common Stock of China Peregrine Food Corporation (the "Corporation")
according to the conditions hereof, as of the date written below.
Date of Conversion:________________________________________________
Applicable Conversion Price Per Share:_____________________________
Conversion Price Calculation:
___________________________________________________
Number of Common Shares Issuable Upon This Conversion:_____________
Signature:_________________________________________________________
Print Name:________________________________________________________
Address:___________________________________________________________
___________________________________________________________________
Deliveries Pursuant to this Notice of Conversion Should Be Made to:
___________________________________________________________________
___________________________________________________________________
EXHIBIT 5.1
(Stibel & Toulan LLP Letterhead)
June 24, 1999
China Peregrine Food Corporation
11300 US Highway 1, Suite 202
North Palm Beach, Florida 33408
Re: Registration Statement on Form SB-2
Ladies and Gentlemen:
We are counsel for China Peregrine Food Corporation, a Delaware
corporation ("China Peregrine"), in connection with the preparation of a
Registration Statement on Form SB-2 of which this opinion is a part, to be
filed with the Securities and Exchange Commission (the "Commission"), for
the sale by certain selling shareholders (the "Selling Shareholders") of
2,461,804 shares of China Peregrine's common stock (the "Common Stock").
In connection with rendering our opinion as set forth below, we have
reviewed and examined originals or copies of such corporate records and
other documents and have satisfied ourselves as to such other matters as we
have deemed necessary to enable us to express our opinion hereinafter set
forth.
Based upon the foregoing, it is our opinion that:
The shares of Common Stock being registered for the account of the
Selling Shareholders have been validly issued, and are fully paid and non-
assessable.
We hereby consent to the filing of this opinion as an Exhibit to the
Registration Statement and to the reference to this firm under the caption
"Interest of Named Expert and Counsel" in the Prospectus included in the
Registration Statement.
Sincerely yours,
/s/ STIBEL & TOULAN LLP
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
China Peregrine Food Corporation
11300 US Highway 1, Suite 202
North Palm Beach, Florida 33408
We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement of our report dated March 31, 1999, relating to the
consolidated financial statements of China Peregrine Food Corporation,
which is contained in that Prospectus.
We also consent to the reference to us under the caption "Interest of
Named Expert and Counsel" in the Prospectus.
/s/ BDO Seidman, LLP
Los Angeles, California
June 24, 1999
Exhibit 99.2
SUBSCRIPTION AGREEMENT
Dear Subscriber:
You (the "Subscriber") hereby agree to purchase, and China Peregrine
Food Corporation, a Delaware corporation (the "Company") hereby agrees to
issue and to sell to the Subscriber, the number of shares of Series D 6%
Cumulative Convertible Preferred Stock, $.001 par value (the "Preferred
Stock") convertible in accordance with the terms thereof into shares of the
Company's $.001 par value common stock (the "Company Shares") and Common
Stock Purchase Warrants ("Warrants") as set forth on the signature page
hereof for the aggregate consideration as set forth on the signature page
hereof ("Purchase Price"). The Certificate of Designation of the Rights of
the Preferred Stock is annexed hereto as Exhibit A ("Certificate of
Designation"). (The Company Shares are sometimes referred to herein as the
"Shares" or "Common Stock"). (The Preferred Stock, the Company Shares,
Warrants, Commission Shares and Common Stock Purchase Warrants issuable to
the Placement Agents ("Placement Warrants"), identified on Schedule B
hereto, and the Common Stock issuable upon exercise of the Warrants and
Placement Warrants are collectively referred to herein as, the
"Securities"). Upon acceptance of this Agreement by the Subscriber, the
Company shall issue and deliver to the Subscriber the Preferred Stock and
Warrants against payment, by federal funds (U.S.) wire transfer of the
Purchase Price. This Subscription Agreement and other similar Subscription
Agreements and the subscription agreements relating to Series D Preferred
Stock to be issued in connection with the Puts described in Section 11
hereof relate to the offering of a maximum of 107,000 shares of Preferred
Stock.
The following terms and conditions shall apply to this subscription.
1. Subscriber's Representations and Warranties. The Subscriber
hereby represents and warrants to and agrees with the Company that:
(a) Information on Company. The Subscriber has been
furnished with and has read the Company's Form 10-SB12G filed on
November 6, 1998 with the U.S. Securities and Exchange Commission
(the "Commission") (with exhibits thereto, hereinafter referred to as
the "Reports"). In addition, the Subscriber has received from the
Company such other information concerning its operations, financial
condition and other matters as the Subscriber has requested, and
considered all factors the Subscriber deems material in deciding on
the advisability of investing in the Securities (such information in
writing is collectively, the "Other Written Information").
(b) Information on Subscriber. The Subscriber is an
"accredited investor", as such term is defined in Regulation D
promulgated by the Commission under the Securities Act of 1933, as
amended, is experienced in investments and business matters, has made
investments of a speculative nature and has purchased securities of
United States publicly-owned companies in private placements in the
past and, with its representatives, has such knowledge and experience
in financial, tax and other business matters as to enable the
Subscriber to utilize the information made available by the Company
to evaluate the merits and risks of and to make an informed
investment decision with respect to the proposed purchase, which
represents a speculative investment. The Subscriber has the
authority and is duly and legally qualified to purchase and own the
Securities. The Subscriber is able to bear the risk of such
investment for an indefinite period and to afford a complete loss
thereof.
(c) Purchase of Company Shares. On the Closing Date, the
Subscriber will purchase the Preferred Stock and Warrants for its own
account and not with a view to any distribution thereof.
(d) Compliance with Securities Act. The Subscriber
understands and agrees that the Securities have not been registered
under the Securities Act of 1933, as amended (the "1933 Act") by
reason of their issuance in a transaction that does not require
registration under the 1933 Act, and that such Securities must be
held unless a subsequent disposition is registered under the 1933
Act or is exempt from such registration.
(e) Preferred Stock and Company Shares Legend. The Preferred
Stock, Company Shares, the Commission Shares and the shares of Common
Stock issuable upon the exercise of the Warrants and Placement
Warrants shall bear the following legend:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THESE
SHARES MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR
HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO
CHINA PEREGRINE FOOD CORPORATION THAT SUCH REGISTRATION IS NOT
REQUIRED."
(f) Warrants Legend. The Warrants and Placement Warrants
shall bear the following legend:
"THIS WARRANT AND THE COMMON SHARES ISSUABLE UPON EXERCISE OF
THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THIS
WARRANT AND THE COMMON SHARES ISSUABLE UPON EXERCISE OF THIS
WARRANT MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR
HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT AS TO THIS WARRANT UNDER SAID ACT AND APPLICABLE
STATE SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY
SATISFACTORY TO CHINA PEREGRINE FOOD CORPORATION THAT SUCH
REGISTRATION IS NOT REQUIRED."
(g) Communication of Offer. The offer to sell the Securities
was directly communicated to the Subscriber. At no time was the
Subscriber presented with or solicited by any leaflet, newspaper or
magazine article, radio or television advertisement, or any other
form of general advertising or solicited or invited to attend a
promotional meeting otherwise than in connection and concurrently
with such communicated offer.
(h) Correctness of Representations. The Subscriber
represents that the foregoing representations and warranties are true
and correct as of the date hereof and, unless the Subscriber
otherwise notifies the Company prior to the Closing Date (as
hereinafter defined), shall be true and correct as of the Closing
Date. The foregoing representations and warranties shall survive the
Closing Date.
2. Company Representations and Warranties. The Company represents
and warrants to and agrees with the Subscriber that:
(a) Due Incorporation. The Company and each of its
subsidiaries is a corporation duly organized, validly existing and in
good standing under the laws of the respective jurisdictionss of
their incorporation and have the requisite corporate power to own
their properties and to carry on their business as now being
conducted. The Company and each of its subsidiaries is duly
qualified as a foreign corporation to do business and is in good
standing in each jurisdiction where the nature of the business
conducted or property owned by it makes such qualification necessary,
other than those jurisdictions in which the failure to so qualify
would not have a material adverse effect on the business, operations
or prospects or condition (financial or otherwise) of the Company.
(b) Outstanding Stock. All issued and outstanding shares of
capital stock of the Company and each of its subsidiaries has been
duly authorized and validly issued and are fully paid and non-
assessable.
(c) Authority; Enforceability. This Agreement has been duly
authorized, executed and delivered by the Company and is a valid and
binding agreement enforceable in accordance with its terms, subject
to bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium and similar laws of general applicability relating to or
affecting creditors' rights generally and to general principles of
equity; and the Company has full corporate power and authority
necessary to enter into this Agreement and to perform its obligations
hereunder and all other agreements entered into by the Company
relating hereto.
(d) Additional Issuances. There are no outstanding
agreements or preemptive or similar rights affecting the Company's
common stock or equity and no outstanding rights, warrants or options
to acquire, or instruments convertible into or exchangeable for, or
agreements or understandings with respect to the sale or issuance of
any shares of common stock or equity of the Company or other equity
interest in any of the subsidiaries of the Company, except as
described in the Reports or Other Written Information.
(e) Consents. No consent, approval, authorization or order
of any court, governmental agency or body or arbitrator having
jurisdiction over the Company, or any of its affiliates, the NASD,
NASDAQ or the Company's Shareholders is required for execution of
this Agreement, and all other agreements entered into by the Company
relating thereto, including, without limitation issuance and sale of
the Securities, and the performance of the Company's obligations
hereunder.
(f) No Violation or Conflict. Assuming the representations
and warranties of the Subscriber in Paragraph 1 are true and correct
and the Subscriber complies with its obligations under this
Agreement, neither the issuance and sale of the Securities nor the
performance of its obligations under this Agreement and all other
agreements entered into by the Company relating thereto by the
Company will:
(i) violate, conflict with, result in a breach of, or
constitute a default (or an event which with the giving of
notice or the lapse of time or both would be reasonably likely
to constitute a default) under (A) the articles of
incorporation, charter or bylaws of the Company, or any of its
affiliates, (B) to the Company's knowledge, any decree,
judgment, order, law, treaty, rule, regulation or determination
applicable to the Company, or any of its affiliates of any
court, governmental agency or body, or arbitrator having
jurisdiction over the Company, or any of its affiliates or over
the properties or assets of the Company, or any of its
affiliates, (C) the terms of any bond, debenture, note or any
other evidence of indebtedness, or any agreement, stock option
or other similar plan, indenture, lease, mortgage, deed of
trust or other instrument to which the Company, or any of its
affiliates is a party, by which the Company, or any of its
affiliates is bound, or to which any of the properties of the
Company, or any of its affiliates is subject, or (D) the terms
of any "lock-up" or similar provision of any underwriting or
similar agreement to which the Company, or any of its
affiliates is a party; or
(ii) result in the creation or imposition of any lien,
charge or encumbrance upon the Securities or any of the assets
of the Company, or any of its affiliates.
(g) The Securities. The Securities upon issuance:
(i) are, or will be, free and clear of any security
interests, liens, claims or other encumbrances, subject to
restrictions upon transfer under the 1933 Act and State laws;
(ii) have been, or will be, duly and validly authorized
and on the date of issuance and on the Closing Date, as
hereinafter defined, and the date the Preferred Stock is
converted, the Securities will be duly and validly issued,
fully paid and nonassessable (and if registered pursuant to the
1933 Act, and resold pursuant to an effective registration
statement will be free trading and unrestricted);
(iii) will not have been issued or sold in violation of
any preemptive or other similar rights of the holders of any
securities of the Company;
(iv) will not subject the holders thereof to personal
liability by reason of being such holders; and
(h) Litigation. There is no pending or, to the best
knowledge of the Company, threatened action, suit, proceeding or
investigation before any court, governmental agency or body, or
arbitrator having jurisdiction over the Company, or any of its
affiliates that would affect the execution by the Company or the
performance by the Company of its obligations under this Agreement,
and all other agreements entered into by the Company relating hereto.
(i) Reporting Company. The Company is a publicly-held
company whose common stock is registered pursuant to Section 12(g) of
the Securities Exchange Act of 1934, as amended (the "1934 Act").
The Company's Common Stock is listed for trading on the NASD OTC
Bulletin Board. Pursuant to the provisions of the 1934 Act, the
Company has timely filed all reports and other materials required to
be filed thereunder with the Securities and Exchange Commission
during the preceding twelve months.
(j) No Market Manipulation. The Company has not taken, and
will not take, directly or indirectly, any action designed to, or
that might reasonably be expected to, cause or result in
stabilization or manipulation of the price of the common stock of the
Company to facilitate the sale or resale of the Securities or affect
the price at which the Securities may be issued.
(k) Information Concerning Company. The Reports and Other
Written Information contain all material information relating to the
Company and its operations and financial condition as of their
respective dates which information is required to be disclosed
therein. Since the date of the financial statements included in the
Reports, and except as modified in the Other Written Information,
there has been no material adverse change in the Company's business,
financial condition or affairs not disclosed in the Reports. The
Reports and Other Written Information do not contain any untrue
statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements
therein not misleading.
(l) Dilution. The number of Shares issuable upon conversion
(as hereinafter defined) may increase substantially in certain
circumstances, including, but not necessarily limited to, the
circumstance wherein the trading price of the Common Stock declines
prior to conversion of the Preferred Stock. The Company's executive
officers and directors have studied and fully understand the nature
of the Securities being sold hereby and recognize that they have a
potential dilutive effect. The board of directors of the Company has
concluded, in its good faith business judgment, that such issuance is
in the best interests of the Company. The Company specifically
acknowledges that its obligation to issue the Shares upon conversion
of the Preferred Stock and exercise of the Warrants and Placement
Warrants is binding upon the Company and enforceable, except as
otherwise described in this Subscription Agreement, regardless of the
dilution such issuance may have on the ownership interests of other
shareholders of the Company.
(m) Stop Transfer. The Securities are restricted securities
as of the date of this Agreement. The Company will not issue any
stop transfer order or other order impeding the sale and delivery of
the Securities at such time as the Securities are registered for
public sale or an exemption from registration is available.
(n) Defaults. Neither the Company nor any of its
subsidiaries is in violation of its Articles of Incorporation or
ByLaws. Neither the Company nor any of its subsidiaries is (i) in
default under or in violation of any other material agreement or
instrument to which it is a party or by which it or any of its
properties are bound or affected, which default or violation would
have a material adverse effect on the Company, (ii) in default with
respect to any order of any court, arbitrator or governmental body or
subject to or party to any order of any court or governmental
authority arising out of any action, suit or proceeding under any
statute or other law respecting antitrust, monopoly, restraint of
trade, unfair competition or similar matters, or (iii) to its
knowledge in violation of any statute, rule or regulation of any
governmental authority material to its business.
(o) No Integrated Offering. Neither the Comany, nor any of
its affiliates, nor any person acting on its or their behalf, has
directly or indirectly made any offers or sales of any security or
solicited any offers to buy any security under circumstances that
would cause the offering of the Securities pursuant to this Agreement
to be integrated with prior offerings by the Company for purposes of
the 1933 Act or any applicable stockholder approval provisions. Nor
will the Company or any of its affiliates or subsidiaries take any
action or steps that would cause the offering of the Securities to be
integrated with other offerings.
(p) Use of Proceeds. The proceeds of the Subscriber funds to
be released to the Company will be used for working capital and for
expenses of this offering.
(q) No General Solicitation. Neither the Company, nor any of
its affiliates, nor to its knowledge, any person acting on its or
their behalf, has engaged in any form of general solicitation or
general advertising (within the meaning of Regulation D under the
Act) in connection with the offer or sale of the Securities.
(r) Listing. The Company's common stock is listed for
trading on NASD OTC Bulletin Board. The Company has not received any
notice that its common stock will be delisted from the OTC Bulletin
Board or that the common stock does not meet all requirements for the
continuation of such listing.
(s) Correctness of Representations. The Company represents
that the foregoing representations and warranties are true and
correct as of the date hereof in all material respects and, unless
the Company otherwise notifies the Subscriber prior to the Closing
Date, shall be true and correct in all material respects as of the
Closing Date. The foregoing representations and warranties shall
survive the Closing Date.
3. Regulation D Offering. This Offering is being made pursuant to
the exemption from the registration provisions of the Securities Act of
1933, as amended, afforded by Rule 506 of Regulation D promulgated
thereunder. On the Closing Date, the Company will provide an opinion
acceptable to Subscriber from the Company's legal counsel opining on the
availability of the Regulation D exemption as it relates to the offer and
issuance of the Securities. A form of the legal opinion is annexed hereto
as Exhibit C. The Company will provide, at the Company's expense, such
other legal opinions in the future as are reasonably necessary for the
conversion of the Preferred Stock, Commission Shares, Warrants and
Placement Warrants.
4. Reissuance of Securities. The Company agrees to reissue
certificates representing the Securities without the legends set forth in
Sections 1(e) and 1(f) above at such time as (a) the holder thereof is
permitted to dispose of such Securities pursuant to Rule 144(k) under the
Act, or (b) upon resale subject to an effective registration statement
after the Securities are registered under the Act. The Company agrees to
cooperate with the Subscriber in connection with all resales pursuant to
Rule 144(d) and Rule 144(k) and provide legal opinions necessary to allow
such resales provided the Company and its counsel receive reasonably
requested certifications from the Subscriber and selling broker, if any.
5. Redemption. The Company may not redeem the Securities without
the consent of the holder of the Securities, except as described in the
Certificate of Designation.
6. Legal Fees/Commissions. The Company shall pay to counsel to
the Subscriber its fee of $15,000 for services rendered to the Subscriber
in reviewing this Agreement and other subscription agreements for the
aggregate subscription amounts of up to $500,000 and acting as escrow
agent. The Company will pay a cash commission of three percent (3%) of the
Purchase Price designated on the signature page hereto to certain Placement
Agents identified on Schedule B hereto. The cash commissions and legal
fees will be payable out of funds held pursuant to a Funds Escrow Agreement
to be entered into by the Company, Subscriber and an Escrow Agent. The
Company will also issue and deliver to the Placement Agents as additional
compensation Preferred Stock of the Company ("Commission Shares") and
Placement Warrants designated on Schedule B hereto. The Commissions will
be issued to the Placement Agents only when, as, and if the corresponding
subscription amount is released from escrow to the Company. All the
representations, covenants, warranties and undertakings, including but not
limited to registration rights made or granted to or for the benefit of the
Subscriber and the terms described in Sections 9.1, 9.2, and 9.3 hereof are
hereby also made and granted to the Placement Agents in respect of the
Commission Shares, Placement Warrants and Company Shares issuable upon
exercise of the Placement Warrants.
7.1. Covenants of the Company. The Company covenants and agrees
with the Subscriber as follows:
(a) The Company will advise the Subscriber, promptly after it
receives notice of issuance by the Securities and Exchange
Commission, any state securities commission or any other regulatory
authority of any stop order or of any order preventing or suspending
any offering of any securities of the Company, or of the suspension
of the qualification of the common stock of the Company for offering
or sale in any jurisdiction, or the initiation of any proceeding for
any such purpose.
(b) The Company shall promptly secure the listing of the
Company Shares, Commission Shares and Common Stock issuable upon the
exercise of the Warrants and Placement Warrants upon each national
securities exchange, or automated quotation system, if any, upon
which shares of Common Stock are then listed (subject to official
notice of issuance) and shall maintain such listing so long as any
other shares of Common Stock shall be so listed. The Company will
use its best efforts to maintain the listing and trading of its
Common Stock on the NASD OTC Bulletin Board, and will comply in all
respects with the Company's reporting, filing and other obligations
under the bylaws or rules of the National Association of Securities
Dealers ("NASD") and such exchanges, as applicable. The Company will
provide the Subscriber copies of all notices it receives notifying
the Company of the threatened and actual delisting of the Common
Stock on any exchange or quotation system on which the Common Stock
is listed.
(c) The Company shall notify the SEC, NASD and applicable
state authorities, in accordance with their requirements, of the
transactions contemplated by this Agreement, and shall take all other
necessary action and proceedings as may be required and permitted by
applicable law, rule and regulation, for the legal and valid issuance
of the Securities to the Subscriber and Placement Agents and promptly
provide copies thereof to Subscriber.
(d) Until at least three (3) years after the effectiveness of
the Registration Statement on Form SB-2 or such other Registration
Statement described in Section 10.1(iv) hereof, the Company will (i)
cause its Common Stock to continue to be registered under Sections
12(b) or 12(g) of the Exchange Act, (ii) comply in all respects with
its reporting and filing obligations under the Exchange Act, and
(iii) comply with all requirements related to any registration
statement filed pursuant to this Agreement. The Company will not
take any action or file any document (whether or not permitted by the
Act or the Exchange Act or the rules thereunder) to terminate or
suspend such registration or to terminate or suspend its reporting
and filing obligations under said Acts until the later of (i) three
(3) years after the effective date of the Registration Statement on
Form SB-2 or such other Registration Statement described in Section
10.1(iv) hereof, or (ii) the sale by the Subscribers and Placement
Agents of all the Company Shares issuable by the Company pursuant to
this Agreement. Until at least two (2) years after the Warrants and
Placement Warrants have been exercised, the Company will use its
commercial best efforts to continue the listing or trading of its
Common Stock on NASD OTC Bulletin Board and will comply in all
respects with the Company's reporting, filing and other obligations
under the bylaws or rules of the NASD and NASDAQ, as appropriate.
(e) The Company undertakes to use the proceeds of the
Subscriber's funds for working capital and expenses of this offering.
8. Covenants of the Company and Subscriber Regarding
Idemnifications.
(a) The Company agrees to indemnify, hold harmless, reimburse
and defend Subscriber against any claim, cost, expense, liability,
obligation, loss or damage (including reasonable legal fees) of any
nature, incurred by or imposed upon Subscriber which results, arises
out of or is based upon (i) any misrepresentation by Company or
breach of any warranty by Company in this Agreement or in any
Exhibits or Schedules attached hereto, or Reports or other Written
Information; or (ii) any breach or default in performance by Company
of any covenant or undertaking to be performed by Company hereunder,
or any other agreement entered into by the Company and Subscribers
relating hereto.
(b) Subscriber agrees to indemnify, hold harmless, reimburse
and defend the Company at all times against any claim, cost, expense,
liability, obligation, loss or damage (including reasonable legal
fees) of any nature, incurred by or imposed upon the Company which
results, arises out of or is based upon (a) any misrepresentation by
Subscriber in this Agreement or in any Exhibits or Schedules attached
hereto; or (b) any breach or default in performance by Subscriber of
any covenant or undertaking to be performed by Subscriber hereunder,
or any other agreement entered into by the Company and Subscribers
relating hereto.
9.1. Conversion.
(a) The Preferred Stock and accrued dividends will be
convertible according to the procedure set forth in the Certificate
of Designation.
(b) The Company understands that a delay in the delivery of
the Company Shares after Conversion, and delivery of Preferred Stock
certificates representing the unconverted balance of a Preferred
Stock certificate tendered for conversion, beyond the date described
for such delivery set forth in the Certificate of Designation or
Mandatory Conversion Date (as that term is employed in the
Certificate of Designation), or late delivery of a Mandatory
Redemption Payment (as defined herein), as the case may be, (each of
the foregoing a "Delivery Date") could result in economic loss to the
Subscriber. As compensation to the Subscriber for such loss, the
Company agrees to pay late payments to the Subscriber for late
delivery of Shares upon Conversion and late delivery of a Preferred
Stock certificates for the unconverted portion of a Preferred Stock
or late delivery of a Mandatory Redemption Payment in the amount of
$100 per business day after the Delivery Date for each $10,000 of
Stated Value of Preferred Stock being converted and Preferred Stock
certificate remaining undelivered or Mandatory Redemption Payment not
paid. The Company shall pay any payments incurred under this Section
in immediately available funds upon demand. Furthermore, in addition
to any other remedies which may be available to the Subscriber, in
the event that the Company fails for any reason to effect delivery of
the Shares within three business days after the Delivery Date, the
Subscriber will be entitled to revoke the relevant Notice of
Conversion by delivery of a notice of revocation to the Company
whereupon the Company and the Subscriber shall each be restored to
their respective positions immediately prior to the delivery of such
notice of revocation, except that late payment charges described
above shall be payable through the date notice of revocation is given
to the Company.
(c) Nothing contained herein or in any document referred to
herein or delivered in connection herewith shall be deemed to
establish or require the payment of a rate of interest or other
charges in excess of the maximum permitted by applicable law. In the
event that the rate of interest or dividends required to be paid or
other charges hereunder exceed the maximum permitted by such law, any
payments in excess of such maximum shall be credited against amounts
owed by the Company to the Subscriber and thus refunded to the
Company.
9.2. Mandatory Redemption. In the event the Company may not issue
Shares on a Delivery Date, then at the Subscriber's election, the Company
must pay to the Subscriber on the Delivery Date a sum of money determined
by multiplying the Stated Value of Preferred Stock not convertible by 120%,
together with accrued but unpaid dividend thereon ("Mandatory Redemption
Payment"). The Mandatory Redemption Payment must be received by the
Subscriber on the same date as the Company Shares otherwise deliverable.
Upon receipt of the Mandatory Redemption Payment, the corresponding
Preferred Stock will be cancelled and no longer outstanding, and if the
Holder is in possession of the corresponding Preferred Stock, same will be
returned to the Company.
9.3. Maximum Conversion. The Company and Subscriber shall not be
entitled to convert on a Conversion Date or effect a Mandatory Conversion
of that amount of the Preferred Stock in connection with that number of
shares of Common Stock which would be in excess of the sum of (i) the
number of shares of Common Stock beneficially owned by the Subscriber and
its affiliates on a Conversion Date, and (ii) the number of shares of
Common Stock issuable upon the conversion of the Preferred Stock with
respect to which the determination of this proviso is being made on a
Conversion Date, which would result in beneficial ownership by the
Subscriber and its affiliates of more than 9.99% of the outstanding shares
of Common Stock of the Company on such Conversion Date. For the purposes
of the proviso to the immediately preceding sentence, beneficial ownership
shall be determined in accordance with Section 13(d) of the Securities
Exchange Act of 1934, as amended, and Regulation 13d-3 thereunder.
10.1. Registration Rights. The Company hereby grants the following
registration rights to holders of the Securities.
(i) On one occasion, for a period commencing 31 days after
the Closing Date, but not later than three years after the Closing
Date, the Company, upon a written request therefor from any record
holder or holders of more than 50% of the aggregate of the Company's
Shares issued and issuable upon Conversion of the Preferred Stock
(the Securities and securities issued or issuable by virtue of
ownership of the Securities, and the Put Securities defined in
Section 11.1(b)(i) hereof if actually issued, being, the "Registrable
Securities"), shall prepare and file with the SEC a registration
statement under the Act covering the Registrable Securities which are
the subject of such request, unless such Registrable Securities are
the subject of an effective registration statement. In addition,
upon the receipt of such request, the Company shall promptly give
written notice to all other record holders of the Registrable
Securities that such registration statement is to be filed and shall
include in such registration statement Registrable Securities for
which it has received written requests within 10 days after the
Company gives such written notice. Such other requesting record
holders shall be deemed to have exercised their demand registration
right under this Section 10.1(i). As a condition precedent to the
inclusion of Registrable Securities, the holder thereof shall provide
the Company with such information as the Company reasonably requests.
The obligation of the Company under this Section 10.1(i) shall be
limited to one registration statement.
(ii) If the Company at any time proposes to register any of
its securities under the Act for sale to the public, whether for its
own account or for the account of other security holders or both,
except with respect to registration statements on Forms S-4, S-8 or
another form not available for registering the Registrable Securities
for sale to the public, provided the Registrable Securities are not
otherwise registered for resale by the Subscriber or Holder pursuant
to an effective registration statement, each such time it will give
at least 30 days' prior written notice to the record holder of the
Registrable Securities of its intention so to do. Upon the written
request of the holder, received by the Company within 30 days after
the giving of any such notice by the Company, to register any of the
Registrable Securities, the Company will cause such Registrable
Securities as to which registration shall have been so requested to
be included with the securities to be covered by the registration
statement proposed to be filed by the Company, all to the extent
required to permit the sale or other disposition of the Registrable
Securities so registered by the holder of such Registrable Securities
(the "Seller"). In the event that any registration pursuant to this
Section 10.1(ii) shall be, in whole or in part, an underwritten
public offering of common stock of the Company, the number of shares
of Registrable Securities to be included in such an underwriting may
be reduced by the managing underwriter if and to the extent that the
Company and the underwriter shall reasonably be of the opinion that
such inclusion would adversely affect the marketing of the securities
to be sold by the Company therein; provided, however, that the
Company shall notify the Seller in writing of any such reduction.
Notwithstanding the forgoing provisions, the Company may withdraw any
registration statement referred to in this Section 10.1(ii) without
thereby incurring any liability to the Seller.
(iii) If, at the time any written request for registration is
received by the Company pursuant to Section 10.1(i), the Company has
determined to proceed with the actual preparation and filing of a
registration statement under the 1933 Act in connection with the
proposed offer and sale for cash of any of its securities for the
Company's own account, such written request shall be deemed to have
been given pursuant to Section 10.1(ii) rather than Section 10.1(i),
and the rights of the holders of Registrable Securities covered by
such written request shall be governed by Section 10.1(ii) except
that the Company or underwriter, if any, may not withdraw such
registration or limit the amount of Registrable Securities included
in such registration.
(iv) The Company shall file with the Commission within 40 days
of the Closing Date (the "Filing Date"), and use its reasonable
commercial efforts to cause to be declared effective a Form SB-2
registration statement (or such other form that it is eligible to
use) within ninety (90) days of the Closing Date in order to register
the Registrable Securities for resale and distribution under the Act.
The registration statement described in this paragraph must be
declared effective by the Commission within 120 days of the Closing
Date (as defined herein) ("Effective Date"). The Company will
register not less than ________ shares of Common Stock in the
aforedescribed registration statement for each $25,000 of Stated
Value of Preferred Stock subscribed for and one share of Common Stock
for each Commission Share and common share issuable upon exercise of
the Warrants and Placement Warrants. The Registrable Securities
shall be reserved and set aside exclusively for the benefit of the
Subscriber and Placement Agents, as the case may be, and not issued,
employed or reserved for anyone other than the Subscriber and
Placement Agents, as the case may be. Such registration statement
will be promptly amended or additional registration statements will
be promptly filed by the Company as necessary to register additional
Company Shares to allow the public resale of all Common Stock
included in and issuable by virtue of the Registrable Securities.
10.2. Registration Procedures. If and whenever the Company is
required by the provisions hereof to effect the registration of any shares
of Registrable Securities under the Act, the Company will, as expeditiously
as possible:
(a) prepare and file with the Commission a registration
statement with respect to such securities and use its best efforts to
cause such registration statement to become and remain effective for
the period of the distribution contemplated thereby (determined as
herein provided), and promptly provide to the holders of Registrable
Securities copies of all filings;
(b) prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in
connection therewith as may be necessary to keep such registration
statement effective for the period specified in paragraph (a) above
and comply with the provisions of the Act with respect to the
disposition of all of the Registrable Securities covered by such
registration statement in accordance with the Seller's intended
method of disposition set forth in such registration statement for
such period;
(c) furnish to the Seller, and to each underwriter if any,
such number of copies of the registration statement and the
prospectus included therein (including each preliminary prospectus)
as such persons reasonably may request in order to facilitate the
public sale or their disposition of the securities covered by such
registration statement;
(d) use its best efforts to register or qualify the Seller's
Registrable Securities covered by such registration statement under
the securities or "blue sky" laws of such jurisdictions as the Seller
and in the case of an underwritten public offering, the managing
underwriter shall reasonably request, provided, however, that the
Company shall not for any such purpose be required to qualify
generally to transact business as a foreign corporation in any
jurisdiction where it is not so qualified or to consent to general
service of process in any such jurisdiction;
(e) list the Registrable Securities covered by such
registration statement with any securities exchange on which the
Common Stock of the Company is then listed;
(f) immediately notify the Seller and each underwriter under
such registration statement at any time when a prospectus relating
thereto is required to be delivered under the Act, of the happening
of any event of which the Company has knowledge as a result of which
the prospectus contained in such registration statement, as then in
effect, includes an untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to
make the statements therein not misleading in light of the
circumstances then existing;
(g) make available for inspection by the Seller, any
underwriter participating in any distribution pursuant to such
registration statement, and any attorney, accountant or other agent
retained by the Seller or underwriter, all publicly available, non-
confidential financial and other records, pertinent corporate
documents and properties of the Company, and cause the Company's
officers, directors and employees to supply all publicly available,
non-confidential information reasonably requested by the seller,
underwriter, attorney, accountant or agent in connection with such
registration statement.
10.3. Provision of Documents.
(a) At the request of the Seller, provided a demand for
registration has been made pursuant to Section 10.1(i) or a request
for registration has been made pursuant to Section 10.1(ii), the
Registrable Securities will be included in a registration statement
filed pursuant to this Section 10. In the event of a firm commitment
underwritten public offering in which the Registrable Securities are
so included, the lockup, if any, requested by the managing
underwriter may not exceed ninety (90) days after the effective date
thereof.
(b) In connection with each registration hereunder, the
Seller will furnish to the Company in writing such information with
respect to itself and the proposed distribution by it as reasonably
shall be necessary in order to assure compliance with federal and
applicable state securities laws. In connection with each
registration pursuant to Section 10.1(i) or 10.1(ii) covering an
underwritten public offering, the Company and the Seller agree to
enter into a written agreement with the managing underwriter in such
form and containing such provisions as are customary in the
securities business for such an arrangement between such underwriter
and companies of the Company's size and investment stature.
10.4. Non-Registration Events. The Company and the Subscriber agree
that the Seller will suffer damages if any registration statement required
under Section 10.1(i) or 10.1(ii) above is not filed within 60 days after
request by the Holder and not declared effective by the Commission within
120 days after such request [or the Filing Date and Effective Date,
respectively, in reference to the Registration Statement on Form SB-2 or
such other form described in Section 10.1(iv)], and maintained in the
manner and within the time periods contemplated by Section 10 hereof, and
it would not be feasible to ascertain the extent of such damages with
precision. Accordingly, if (i) the Registration Statement described in
Sections 10.1(i) or 10.1(ii) is not filed within 60 days of such request,
or is not declared effective by the Commission on or prior to the date that
is 120 days after such request, or (ii) the registration statement on Form
SB-2 or such other form described in Section 10.1(iv) is not filed on or
before the Filing Date or not declared effective on or before the sooner of
the Effective Date, or within five days of receipt by the Company of a
communication from the Commission that the registration statement described
in Section 10.1(iv) will not be reviewed, or (iii) any registration
statement described in Sections 10.1(i), 10.1(ii) or 10.1(iv) is filed and
declared effective but shall thereafter cease to be effective (without
being succeeded immediately by an additional registration statement filed
and declared effective) for a period of time which shall exceed 30 days in
the aggregate per year but not more than 20 consecutive calendar days
(defined as a period of 365 days commencing on the date the Registration
Statement is declared effective) (each such event referred to in clauses
(i), (ii) and (iii) of this Section 10.4 is referred to herein as a "Non-
Registration Event"), then, for so long as such Non-Registration Event
shall continue, the Company shall pay in cash as Liquidated Damages to each
holder of any Registrable Securities an amount equal to two (2%) percent
for each thirty (30) days or part thereof, of the Purchase Price of the
Preferred Stock and Company Shares, the Stated Value of the Commission
Shares or Company Shares issued upon the conversion thereof, and the
aggregate amount of the exercise prices of the Warrants and Placement
Warrants, whether or not exercised, then owned of record by such holder as
of the occurrence of such Non-Registration Event. Payments to be made
pursuant to this Section 10.4 shall be due and payable immediately upon
demand in immediately available funds. Demand for payment of Liquidated
Damages must be made by a holder within 90 days after the final accrual of
such Liquidated Damages. In the event a mandatory payment for Preferred
Stock is demanded from the Company by the Holder of Preferred Stock,
pursuant to Section 8 of the Certificate of Designation, then the
Liquidated Damages described in this Section 10.4 shall no longer accrue
from and after the date the Holder receives the payment described in
Section 8 of the Certificate of Designation.
10.5. Expenses. All expenses incurred by the Company in complying
with Section 10, including, without limitation, all registration and filing
fees, printing expenses, fees and disbursements of counsel and independent
public accountants for the Company, fees and expenses (including counsel
fees) incurred in connection with complying with state securities or "blue
sky" laws, fees of the National Association of Securities Dealers, Inc.,
transfer taxes, fees of transfer agents and registrars, fee of one counsel,
if any, to represent all the Sellers, and costs of insurance are called
"Registration Expenses". All underwriting discounts and selling commissions
applicable to the sale of Registrable Securities, including any fees and
disbursements of any special counsel to the Seller, are called "Selling
Expenses". The Seller shall pay the fees of its own additional counsel, if
any.
The Company will pay all Registration Expenses in connection with the
registration statement under Section 10. All Selling Expenses in
connection with each registration statement under Section 10 shall be borne
by the Seller and may be apportioned among the Sellers in proportion to the
number of shares sold by the Seller relative to the number of shares sold
under such registration statement or as all Sellers thereunder may agree.
10.6. Indemnification and Contribution.
(a) In the event of a registration of any Registrable
Securities under the Act pursuant to Section 10, the Company will
indemnify and hold harmless the Seller, each officer of the Seller,
each director of the Seller, each underwriter of such Registrable
Securities thereunder and each other person, if any, who controls
such Seller or underwriter within the meaning of the 1933 Act,
against any losses, claims, damages or liabilities, joint or several,
to which the Seller, or such underwriter or controlling person may
become subject under the Act or otherwise, insofar as such losses,
claims, damages or liabilities (or actions in respect thereof) arise
out of or are based upon any untrue statement or alleged untrue
statement of any material fact contained in any registration
statement under which such Registrable Securities was registered
under the Act pursuant to Section 10, any preliminary prospectus or
final prospectus contained therein, or any amendment or supplement
thereof, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading,
and will reimburse the Seller, each such underwriter and each such
controlling person for any legal or other expenses reasonably
incurred by them in connection with investigating or defending any
such loss, claim, damage, liability or action; provided, however,
that the Company will not be liable in any such case if and to the
extent that any such loss, claim, damage or liability arises out of
or is based upon an untrue statement or alleged untrue statement or
omission or alleged omission so made in conformity with information
furnished by any such Seller, the underwriter or any such controlling
person in writing specifically for use in such registration statement
or prospectus.
(b) In the event of a registration of any of the Registrable
Securities under the Act pursuant to Section 10, the Seller will
indemnify and hold harmless the Company, and each person, if any, who
controls the Company within the meaning of the Act, each officer of
the Company who signs the registration statement, each director of
the Company, each underwriter and each person who controls any
underwriter within the meaning of the Act, against all losses,
claims, damages or liabilities, joint or several, to which the
Company or such officer, director, underwriter or controlling person
may become subject under the Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in the
registration statement under which such Registrable Securities were
registered under the Act pursuant to Section 10, any preliminary
prospectus or final prospectus contained therein, or any amendment or
supplement thereof, or arise out of or are based upon the omission or
alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not
misleading, and will reimburse the Company and each such officer,
director, underwriter and controlling person for any legal or other
expenses reasonably incurred by them in connection with investigating
or defending any such loss, claim, damage, liability or action,
provided, however, that the Seller will be liable hereunder in any
such case if and only to the extent that any such loss, claim, damage
or liability arises out of or is based upon an untrue statement or
alleged untrue statement or omission or alleged omission made in
reliance upon and in conformity with information pertaining to such
Seller, as such, furnished in writing to the Company by such Seller
specifically for use in such registration statement or prospectus,
and provided, further, however, that the liability of the Seller
hereunder shall be limited to the proportion of any such loss, claim,
damage, liability or expense which is equal to the proportion that
the public offering price of the Registrable Securities sold by the
Seller under such registration statement bears to the total public
offering price of all securities sold thereunder, but not in any
event to exceed the gross proceeds received by the Seller from the
sale of Registrable Securities covered by such registration
statement.
(c) Promptly after receipt by an indemnified party hereunder
of notice of the commencement of any action, such indemnified party
shall, if a claim in respect thereof is to be made against the
indemnifying party hereunder, notify the indemnifying party in
writing thereof, but the omission so to notify the indemnifying party
shall not relieve it from any liability which it may have to such
indemnified party other than under this Section 10.6(c) and shall
only relieve it from any liability which it may have to such
indemnified party under this Section 10.6(c) if and to the extent the
indemnifying party is prejudiced by such omission. In case any such
action shall be brought against any indemnified party and it shall
notify the indemnifying party of the commencement thereof, the
indemnifying party shall be entitled to participate in and, to the
extent it shall wish, to assume and undertake the defense thereof
with counsel satisfactory to such indemnified party, and, after
notice from the indemnifying party to such indemnified party of its
election so to assume and undertake the defense thereof, the
indemnifying party shall not be liable to such indemnified party
under this Section 10.6(c) for any legal expenses subsequently
incurred by such indemnified party in connection with the defense
thereof other than reasonable costs of investigation and of liaison
with counsel so selected, provided, however, that, if the defendants
in any such action include both the indemnified party and the
indemnifying party and the indemnified party shall have reasonably
concluded that there may be reasonable defenses available to it which
are different from or additional to those available to the
indemnifying party or if the interests of the indemnified party
reasonably may be deemed to conflict with the interests of the
indemnifying party, the indemnified parties shall have the right to
select one separate counsel and to assume such legal defenses and
otherwise to participate in the defense of such action, with the
reasonable expenses and fees of such separate counsel and other
expenses related to such participation to be reimbursed by the
indemnifying party as incurred.
(d) In order to provide for just and equitable contribution
in the event of joint liability under the Act in any case in which
either (i) the Seller, or any controlling person of the Seller, makes
a claim for indemnification pursuant to this Section 10.6 but it is
judicially determined (by the entry of a final judgment or decree by
a court of competent jurisdiction and the expiration of time to
appeal or the denial of the last right of appeal) that such
indemnification may not be enforced in such case notwithstanding the
fact that this Section 10.6 provides for indemnification in such
case, or (ii) contribution under the Act may be required on the part
of the Seller or controlling person of the Seller in circumstances
for which indemnification is provided under this Section 10.6; then,
and in each such case, the Company and the Seller will contribute to
the aggregate losses, claims, damages or liabilities to which they
may be subject (after contribution from others) in such proportion so
that the Seller is responsible only for the portion represented by
the percentage that the public offering price of its securities
offered by the registration statement bears to the public offering
price of all securities offered by such registration statement,
provided, however, that, in any such case, (A) the Seller will not be
required to contribute any amount in excess of the public offering
price of all such securities offered by it pursuant to such
registration statement; and (B) no person or entity guilty of
fraudulent misrepresentation (within the meaning of Section 10(f) of
the Act) will be entitled to contribution from any person or entity
who was not guilty of such fraudulent misrepresentation.
11.1. Obligation To Purchase.
(a) The Subscriber agrees to purchase from the Company up to
the additional shares of Preferred Stock ("First Put Stock" and
"Second Put Stock", collectively "Put Stock") and up to the Warrants
("First Put Warrants" and "Second Put Warrants", collectively "Put
Warrants") described on the signature page hereof for up to the
aggregate consideration designated on the signature page hereof (the
"First Put" and the "Second Put"). Collectively the Put Stock, Put
Warrants and Put Commissions (as hereinafter defined) are referred to
as the "Put Securities".)
(b) The agreement to purchase the Put Stock is contingent on
the following:
(i) The timely filing of the registration statement
described in Section 10.1(iv) hereof relating to all the
Registrable Securities.
(ii) As of the Put Date, First Put Closing Date and
Second Put Closing Date (all as hereinafter defined), the
Company will be a full reporting company with the class of
Shares registered pursuant to Section 12(g) of the Securities
Exchange Act of 1934.
(iii) The Closing Bid Price (as defined in the
Certificate of Designation) for the five trading days prior to
a Put Date will not be less than $1.25, nor will the aggregate
trading activity in the Company's Common Stock be less than
$20,000 per day for each of the five trading days prior to a
Put Date (unless otherwise agreed to by Subscriber). In the
event the foregoing trading price and trading activity are not
attained and the Subscriber does not waive the requirement in
this Section 11.1(b), then the offering restriction in Section
12(b) shall not thereafter apply.
(iv) No material adverse change in the Company's
business or business prospects shall have occurred after the
date of the most recent financial statements included in the
Reports. Material adverse change is defined as any effect on
the business, operations, properties, prospects, or financial
condition of the Company that is material and adverse to the
Company and its subsidiaries and affiliates, taken as a whole,
and/or any condition, circumstance, or situation that would
prohibit or otherwise interfere with the ability of the Company
to enter into and perform any of its obligations under this
Agreement, or any other agreement entered into or to be entered
into in connection herewith, in any material respect.
(v) The non-occurrence (whether or not continuing) of
an Event of Default as described in Section 8 of the
Certificate of Designation.
(vi) The execution and delivery to the Subscriber of a
certificate signed by its chief executive officer representing
the truth and accuracy of all the Company's representations and
warranties contained in this Subscription Agreement as of the
Put Date, and the First Put Closing Date and Second Put Closing
Date and confirming the undertakings contained herein, and
representing the satisfaction of all contingencies and
conditions required for the exercise of the Put.
(vii) The Company's compliance with the listing
requirements of the NASD OTC Bulletin Board, and the Company's
not having received notice from the NASD OTC Bulletin Board
(and any principal market on which the Company's Common Stock
is listed for trading) that the Company is not in compliance
with the requirements for continued listing.
(viii) The execution by the Company and delivery to the
Subscriber of all documents reasonably necessary to memorialize
the rights and obligations of each of the parties in relation
to the Put.
(c) The exercise of the Second Put is further contingent on
the declaration of effectiveness by the Securities and Exchange
Commission and the continued effectiveness of the Registration
Statement on Form SB-2 or such other form as described in Section
10.1(iv) hereof relating to the Registrable Securities and the
Company's ability to issue Common Stock upon conversion and/or
exercise of the Put Securities, pursuant to an effective registration
statement, with such Common Stock, upon resale, being unlegended
freely transferable Common Stock.
11.2. Exercise of Put.
(a) The Company's right to exercise the First Put expires one
week after the filing of the registration statement described in
Section 10.1(iv) of this Subscription Agreement relating to all the
Registrable Securities. The Company's right to exercise the Second
Put expires seven (7) days after the effective date of the
registration statement relating to the Registrable Securities
described in Section 10.1(iv) above.
(b) The First Put and Second Put may be exercised by the
Company by the giving to the Subscriber of a written notice of
exercise ("Put Notice") during the respective exercise periods of the
First Put and Second Put in relation to all the subject Put
Securities. The date a Put Notice is given is a Put Date. The First
Put Notice must be accompanied by the (i) officer's certificate
described in Section 11.1(b)(vi) above; (ii) a copy of the filed
registration statement; and (iii) a legal opinion relating to the Put
Securities substantially similar to the legal opinion attached hereto
as Exhibit C. The Second Put Notice must be accompanied by the (i)
officer's certificate described in Section 11.1(b)(vi) above; (ii) a
copy of the filed registration statement; (iii) notice of declaration
of effectiveness; (iv) five copies of the final prospectus; and (v) a
legal opinion relating to the Put Securities substantially similar to
the legal opinion attached hereto as Exhibit C.
(c) Unless otherwise agreed to by the Subscribers, Put
Notices must be given to all Subscribers in proportion to the amounts
agreed to be purchased by all Subscribers undertaking to purchase Put
Shares in the $500,000 offering to which this Subscription Agreement
relates. The aggregate amount of all such Put Notices may not exceed
$500,000.
(d) Payment by the Subscriber in relation to a Put Notice
relating to the First Put must be made within seven (7) days of
receipt of a Put Notice relating to the First Put and within 45 days
after receipt by the Subscriber of a Put Notice relating to the
Second Put. Payment will be made against delivery to the Subscriber
or an escrow agent to be agreed upon by the Company and Subscriber,
of the Put Securities and items set forth in Section 11.2(b) above,
and delivery to the Placement Agents of the Put Commissions relating
to the Put being exercised, and delivery to the Placement Agents of
the Put Commissions relating to the First Put.
11.3. Put Warrants.
(a) The First Put Warrants and Put Commission Warrants (as
defined herein) payable in connection therewith will be identical to
the Warrants except that such First Put Warrants will be exercisable
commencing on the First Put Closing Date and for three years
thereafter.
(b) The Second Put Warrants and Put Commission Warrants (as
defined herein) payable in connection therewith will be identical to
the Warrants except that such Second Put Warrants will be exercisable
commencing on the Second Put Closing Date and for three years
thereafter.
11.4. Put Commissions. The Placement Agents identified on Schedule B
hereto shall receive commissions in connection with the exercise of the
First Put and Second Put as follows: (i) cash equal to three (3%) percent
of the purchase price of the Put Stock, as set forth on the signature page
hereto; (ii) Preferred Stock having a Stated Value equal to seven (7%)
percent of the purchase price of the Put Stock as set forth on the
signature page hereto; and (iii) one First Put Warrant or one Second Put
Warrant for each $10 of First Put purchase price or Second Put purchase
price paid by a Subscriber in connection with the First Put or Second Put.
Collectively, the foregoing are referred to as Put Commissions. Put
Commissions shall be payable only in connection with the First Put Purchase
Price and Second Put Purchase Price actually paid by a Subscriber. Put
Commissions shall be paid and the attorney for the Subscriber shall receive
a payment at the Closing of each Put equal to one (1%) percent of the Put
purchase price for each Put.
12. (a) Right of First Refusal. Until 120 days after the
effective date of the Registration Statement described in Section 10.1(iv)
hereof, the Subscriber shall be given not less than ten (10) business days
prior written notice of any proposed sale by the Company of its common
stock or other securities or debt obligations except as disclosed in the
Reports or Other Written Information. The Subscriber shall have the right
during the ten (10) business days following the notice to agree to purchase
an amount of Company Shares in the same proportion as being purchased in
the aggregate offering to which this Subscription Agreement relates (i.e.
$500,000 in the aggregate), of those securities proposed to be issued and
sold, in accordance with the terms and conditions set forth in the notice
of sale. In the event such terms and conditions are modified during the
notice period, the Subscriber shall be given prompt notice of such
modification and shall have the right during the original notice period or
for a period of ten (10) business days following the notice of
modification, whichever is longer, to exercise such right. In the event
the right of first refusal described in this Section is exercised by the
Subscriber and the Company thereby receives net proceeds from such
exercise, then commissions and fees will be paid by the Company to the
Placement Agents in the same amounts as specified in the notice of sale.
(b) Offering Restrictions. Except with respect to securities
otherwise disclosed in the Reports or Other Written Information, the
Company will not issue any equity, convertible debt or other securities
which are or could be (by conversion or registration) free-trading
securities prior to the expiration of 120 days from the Effective Date (the
Exclusion Period). This restriction shall not prohibit the Company from
issuing any equity, convertible debt or other securities prior to the
expiration of the Exclusion Period, provided that such equity, convertible
debt or other securities are restricted securities when issued and remain
restricted until the expiration of such 120 day Exclusion Period.
13. Miscellaneous.
(a) Notices. All notices or other communications given or
made hereunder shall be in writing and shall be personally delivered
or deemed delivered the first business day after being telecopied
(provided that a copy is delivered by first class mail) to the party
to receive the same at its address set forth below or to such other
address as either party shall hereafter give to the other by notice
duly made under this Section: (i) if to the Company, to China
Peregrine Food Corporation, 11300 U.S. Highway 1, Suite 202, North
Palm Beach, Florida 33408, telecopier number: (561) 625-1413, with a
copy by telecopier only to Roy D. Toulan, Jr., Esq., telecopier
number: (617) 523-6100, and (ii) if to the Subscriber, to the name,
address and telecopy number set forth on the signature page hereto,
with a copy by telecopier only to Grushko & Mittman, 277 Broadway,
Suite 801, New York, New York 10007, telecopier number: (212) 227-
5865. Any notice that may be given pursuant to this Agreement, or
any document delivered in connection with the foregoing may be given
by the Subscriber on the first business day after the observance
dates in the United States of America by Orthodox Jewry of Rosh
Hashanah, Yom Kippur, the first two days of the Feast of Tabernacles,
Shemini Atzeret Simchat Torah, the first two and final two days of
Passover and Pentecost, with such notice to be deemed given and
effective, at the election of the Subscriber on a holiday date that
precedes such notice. Any notice received by the Subscriber on any
of the aforedescribed holidays may be deemed by the Subscriber to be
received and effective as if such notice had been received on the
first business day after the holiday.
(b) Closing. The consummation of the transactions
contemplated herein shall take place at the offices of Grushko &
Mittman, 277 Broadway, Suite 801, New York, New York 10007, upon the
satisfaction of all conditions to Closing set forth in this
Agreement. The closing date shall be the date that subscriber funds
representing the net amount due the Company from the Purchase Price
are transmitted by wire transfer to the Company (the "Closing Date").
The closing date for the First Put and Second Put shall be the
respective dates on which Subscriber funds representing the net
amount due the Company from the First Put Purchase Price and Second
Put Purchase Price, respectively due, transmitted to or on behalf of
the Company ("First Put Closing Date", "Second Put Closing Date").
(c) Entire Agreement; Assignment. This Agreement represents
the entire agreement between the parties hereto with respect to the
subject matter hereof and may be amended only by a writing executed
by both parties. No right or obligation of either party shall be
assigned by that party without prior notice to and the written
consent of the other party.
(d) Execution. This Agreement may be executed by facsimile
transmission, and in counterparts, each of which will be deemed an
original.
(e) Law Governing this Agreement. This Agreement shall be
governed by and construed in accordance with the laws of the State of
New York without regard to principles of conflicts of laws. Any
action brought by either party against the other concerning the
transactions contemplated by this Agreement shall be brought only in
the state courts of New York or in the federal courts located in the
state of New York. Both parties and the individuals executing this
Agreement and other agreements on behalf of the Company agree to
submit to the jurisdiction of such courts and waive trial by jury.
The prevailing party shall be entitled to recover from the other
party its reasonable attorney's fees and costs. In the event that
any provision of this Agreement or any other agreement delivered in
connection herewith is invalid or unenforceable under any applicable
statute or rule of law, then such provision shall be deemed
inoperative to the extent that it may conflict therewith and shall be
deemed modified to conform with such statute or rule of law. Any
such provision which may prove invalid or unenforceable under any law
shall not affect the validity or enforceability of any other
provision of any agreement.
(f) Specific Enforcement, Consent to Jurisdiction. The
Company and Subscriber acknowledge and agree that irreparable damage
would occur in the event that any of the provisions of this Agreement
were not performed in accordance with their specific terms or were
otherwise breached. It is accordingly agreed that the parties shall
be entitled to an injunction or injunctions to prevent or cure
breaches of the provisions of this Agreement and to enforce
specifically the terms and provisions hereof or thereof, this being
in addition to any other remedy to which any of them may be entitled
by law or equity. Subject to Section 13(e) hereof, each of the
Company and Subscriber hereby waives, and agrees not to assert in any
such suit, action or proceeding, any claim that it is not personally
subject to the jurisdiction of such court, that the suit, action or
proceeding is brought in an inconvenient forum or that the venue of
the suit, action or proceeding is improper. Nothing in this Section
shall affect or limit any right to serve process in any other manner
permitted by law.
(g) Automatic Termination. This Agreement shall
automatically terminate without any further action of either party
hereto if the Closing shall not have occurred by the tenth (10th)
business day following the date this Agreement is accepted by the
Subscriber.
[THIS SPACE INTENTIONALLY LEFT BLANK]
Please acknowledge your acceptance of the foregoing Subscription
Agreement by signing and returning a copy to the undersigned whereupon it
shall become a binding agreement between us.
CHINA PEREGRINE FOOD CORPORATION
By:_______________________________
Dated: March 8, 1999
Purchase Price: $162,500.00
Preferred Shares Purchased: 16,250 (at $10 per share)
Common Stock Purchase Warrants: 16,250
ACCEPTED: Dated as of March ____, 1999
FIRST PUT
First Put Stock: 8,125 Preferred Shares
First Put Warrants: 8,125
First Put Purchase Price: $81,250.00
SECOND PUT
Second Put Stock: 8,125 Preferred Shares
Second Put Warrants: 8,125
Second Put Purchase Price: $81,250.00
AUSTINVEST ANSTALT BALZERS - Subscriber
(A Lichenstein corporation)
Landstrasse 938
9494 Furstentums
Balzers, Liechtenstein
Fax: 011-534-534100
By:____________________________
Please acknowledge your acceptance of the foregoing Subscription
Agreement by signing and returning a copy to the undersigned whereupon it
shall become a binding agreement between us.
CHINA PEREGRINE FOOD CORPORATION
By:_______________________________
Dated: March 8, 1999
Purchase Price: $162,500.00
Preferred Shares Purchased: 16,250 (at $10 per share)
Common Stock Purchase Warrants: 16,250
ACCEPTED: Dated as of March ____, 1999
FIRST PUT
First Put Stock: 8,125 Preferred Shares
First Put Warrants: 8,125
First Put Purchase Price: $81,250.00
SECOND PUT
Second Put Stock: 8,125 Preferred Shares
Second Put Warrants: 8,125
Second Put Purchase Price: $81,250.00
ESQUIRE TRADE & FINANCE INC. - Subscriber
(A B.V.I. corporation)
Trident Chambers
P.O. Box 146
Road Town, Tortola, B.V.I.
Fax: 011-41-41-760-1031
By:____________________________
Please acknowledge your acceptance of the foregoing Subscription
Agreement by signing and returning a copy to the undersigned whereupon it
shall become a binding agreement between us.
CHINA PEREGRINE FOOD CORPORATION
By:_______________________________
Dated: March 8, 1999
Purchase Price: $175,000.00
Preferred Shares Purchased: 17,500 (at $10 per share)
Common Stock Purchase Warrants: 17,500
ACCEPTED: Dated as of March ____, 1999
FIRST PUT
First Put Stock: 8,750 Preferred Shares
First Put Warrants: 8,750
First Put Purchase Price: $87,500.00
SECOND PUT
Second Put Stock: 8,750 Preferred Shares
Second Put Warrants: 8,750
Second Put Purchase Price: $87,500.00
AMRO INTERNATIONAL, S.A. - Subscriber
(A Panama corporation)
c/o Ultra Finanz
Grossmuenster Platz 26
P.O. Box 4401
Zurich, Switzerland CH 8022
Fax: 011-411-262-5512
By:____________________________
SCHEDULE B TO SUBSCRIPTION AGREEMENT
<TABLE>
<CAPTION>
PLACEMENT AGENT CASH COMMISSION PLACEMENT WARRANTS COMMISSION SHARES
- --------------- --------------- ------------------ -----------------
<S> <C> <C> <C>
LIBRA FINANCE S.A. $12,375.00 -0- -0-
P.O. Box 4603
Zurich, Switzerland
Fax: 011-411-201-6262
SETTONDOWN CAPITAL INTERNATIONAL, LTD. $ -0- 50,000 3,500
600 California Street, 14th Floor
San Franciso, CA 94108
Fax: 415-835-8320
AMRO INTERNATIONAL, SA $ 2,625.00 -0- -0-
c/o Ultra Finanz
Grossmuenster Platz 26
P.O. Box 4401
Zurich, Switzerland CH 8022
Fax: 011-411-262-5512
TOTALS $15,000.00 50,000 3,500
</TABLE>
Exhibit 99.3
THIS WARRANT AND THE COMMON SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR
APPLICABLE STATE SECURITIES LAWS. THIS WARRANT AND THE COMMON SHARES
ISSUABLE UPON EXERCISE OF THIS WARRANT MAY NOT BE SOLD, OFFERED FOR SALE,
PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT AS TO THIS WARRANT UNDER SAID ACT AND APPLICABLE STATE SECURITIES
LAWS OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO CHINA PEREGRINE
FOOD CORPORATION THAT SUCH REGISTRATION IS NOT REQUIRED.
Right to Purchase 16,250 Shares of Common Stock
of China Peregrine Food Corporation (subject to
adjustment as provided herein)
COMMON STOCK PURCHASE WARRANT
No. 1 March , 1999
CHINA PEREGRINE FOOD CORPORATION, a corporation organized under the
laws of the State of Delaware (the "Company"), hereby certifies that, for
value received, AUSTINVEST ANSTALT BALZERS, or assigns, is entitled,
subject to the terms set forth below, to purchase from the Company after
March ____, 1999 at any time or from time to time before 5:00 p.m., New
York time, on March ____, 2002 (the "Expiration Date"), up to 16,250 fully
paid and nonassessable shares of Common Stock (as hereinafter defined),
$.001 par value per share, of the Company, at a purchase price of $______
per share (such purchase price per share as adjusted from time to time as
herein provided is referred to herein as the "Purchase Price"). The number
and character of such shares of Common Stock and the Purchase Price are
subject to adjustment as provided herein.
As used herein the following terms, unless the context otherwise
requires, have the following respective meanings:
(a) The term Company shall include China Peregrine Food
Corporation and any corporation which shall succeed or assume the
obligations of China Peregrine Food Corporation hereunder.
(b) The term "Common Stock" includes (a) the Company's Common
Stock, $.001 par value per share, as authorized on the date of the
Agreement, (b) any other capital stock of any class or classes
(however designated) of the Company, authorized on or after such
date, the holders of which shall have the right, without limitation
as to amount, either to all or to a share of the balance of current
dividends and liquidating dividends after the payment of dividends
and distributions on any shares entitled to preference, and the
holders of which shall ordinarily, in the absence of contingencies,
be entitled to vote for the election of a majority of directors of
the Company (even if the right so to vote has been suspended by the
happening of such a contingency) and (c) any other securities into
which or for which any of the securities described in (a) or (b) may
be converted or exchanged pursuant to a plan of recapitalization,
reorganization, merger, sale of assets or otherwise.
(c) The term "Other Securities" refers to any stock (other
than Common Stock) and other securities of the Company or any other
person (corporate or otherwise) which the holder of the Warrant at
any time shall be entitled to receive, or shall have received, on the
exercise of the Warrant, in lieu of or in addition to Common Stock,
or which at any time shall be issuable or shall have been issued in
exchange for or in replacement of Common Stock or Other Securities
pursuant to Section 4 or otherwise.
1. Exercise of Warrant.
1.1. Number of Shares Issuable upon Exercise. From and after
the date hereof through and including the Expiration Date, the holder
hereof shall be entitled to receive, upon exercise of this Warrant in
whole in accordance with the terms of subsection 1.2 or upon exercise
of this Warrant in part in accordance with subsection 1.3, shares of
Common Stock of the Company, subject to adjustment pursuant to
Section 4.
1.2. Full Exercise. This Warrant may be exercised in full by
the holder hereof by surrender of this Warrant, with the form of
subscription attached as Exhibit A hereto (the Subscription Form")
duly executed by such holder, to the Company at its principal office
or at the office of its Warrant agent (as provided in Section 11),
accompanied by payment, in cash or by certified or official bank
check payable to the order of the Company, in the amount obtained by
multiplying the number of shares of Common Stock for which this
Warrant is then exercisable by the Purchase Price (as hereinafter
defined) then in effect.
1.3. Partial Exercise. This Warrant may be exercised in part
(but not for a fractional share) by surrender of this Warrant in the
manner and at the place provided in subsection 1.2 except that the
amount payable by the holder on such partial exercise shall be the
amount obtained by multiplying (a) the number of shares of Common
Stock designated by the holder in the Subscription Form by (b) the
Purchase Price then in effect. On any such partial exercise, the
Company, at its expense, will forthwith issue and deliver to or upon
the order of the holder hereof a new Warrant of like tenor, in the
name of the holder hereof or as such holder (upon payment by such
holder of any applicable transfer taxes), may request, the number of
shares of Common Stock for which such Warrant may still be exercised.
1.4. Fair Market Value. Fair Market Value of a share of Common
Stock as of a particular date (the "Determination Date") shall mean
the Fair Market Value of a share of the Company's Common Stock. Fair
Market Value of a share of Common Stock as of a Determination Date
shall mean:
(a) If the Company's Common Stock is traded on an
exchange or is quoted on the National Association of Securities
Dealers, Inc. Automated Quotation ("NASDAQ") National Market
System or the NASDAQ SmallCap Market, then the closing or last
sale price, respectively, reported for the last business day
immediately preceding the Determination Date.
(b) If the Company's Common Stock is not traded on an
exchange or on the NASDAQ National Market System or the NASDAQ
SmallCap Market but is traded in the over-the-counter market,
then the mean of the closing bid and asked prices reported for
the last business day immediately preceding the Determination
Date.
(c) Except as provided in clause (d) below, if the
Company's Common Stock is not publicly traded, then as the
Holder and the Company agree or in the absence of agreement by
arbitration in accordance with the rules then standing of the
American Arbitration Association, before a single arbitrator to
be chosen from a panel of persons qualified by education and
training to pass on the matter to be decided.
(d) If the Determination Date is the date of a
liquidation, dissolution or winding up, or any event deemed to
be a liquidation, dissolution or winding up pursuant to the
Company's charter, then all amounts to be payable per share to
holders of the Common Stock pursuant to the charter in the
event of such liquidation, dissolution or winding up, plus all
other amounts to be payable per share in respect of the Common
Stock in liquidation under the charter, assuming for the
purposes of this clause (d) that all of the shares of Common
Stock then issuable upon exercise of all of the Warrants are
outstanding at the Determination Date.
1.5. Company Acknowledgment. The Company will, at the time of
the exercise of the Warrant, upon the request of the holder hereof
acknowledge in writing its continuing obligation to afford to such
holder any rights to which such holder shall continue to be entitled
after such exercise in accordance with the provisions of this
Warrant. If the holder shall fail to make any such request, such
failure shall not affect the continuing obligation of the Company to
afford to such holder any such rights.
1.6. Trustee for Warrant Holders. In the event that a bank or
trust company shall have been appointed as trustee for the holders of
the Warrants pursuant to Subsection 3.2, such bank or trust company
shall have all the powers and duties of a warrant agent appointed
pursuant to Section 10 and shall accept, in its own name for the
account of the Company or such successor person as may be entitled
thereto, all amounts otherwise payable to the Company or such
successor, as the case may be, on exercise of this Warrant pursuant
to this Section 1.
2. Delivery of Stock Certificates, etc. on Exercise. The Company
agrees that the shares of Common Stock purchased upon exercise of this
Warrant shall be deemed to be issued to the holder hereof as the record
owner of such shares as of the close of business on the date on which this
Warrant shall have been surrendered and payment made for such shares as
aforesaid. As soon as practicable after the exercise of this Warrant in
full or in part, and in any event within 10 days thereafter, the Company at
its expense (including the payment by it of any applicable issue taxes)
will cause to be issued in the name of and delivered to the holder hereof,
or as such holder (upon payment by such holder of any applicable transfer
taxes) may direct in compliance with applicable Securities Laws, a
certificate or certificates for the number of duly and validly issued,
fully paid and nonassessable shares of Common Stock (or Other Securities)
to which such holder shall be entitled on such exercise, plus, in lieu of
any fractional share to which such holder would otherwise be entitled, cash
equal to such fraction multiplied by the then Fair Market Value of one full
share, together with any other stock or other securities and property
(including cash, where applicable) to which such holder is entitled upon
such exercise pursuant to Section 1 or otherwise.
3. Adjustment for Reorganization, Consolidation, Merger, etc.
3.1. Reorganization, Consolidation, Merger, etc. In case at
any time or from time to time, the Company shall (a) effect a
reorganization, (b) consolidate with or merge into any other person,
or (c) transfer all or substantially all of its properties or assets
to any other person under any plan or arrangement contemplating the
dissolution of the Company, then, in each such case, as a condition
to the consummation of such a transaction, proper and adequate
provision shall be made by the Company whereby the holder of this
Warrant, on the exercise hereof as provided in Section 1 at any time
after the consummation of such reorganization, consolidation or
merger or the effective date of such dissolution, as the case may be,
shall receive, in lieu of the Common Stock (or Other Securities)
issuable on such exercise prior to such consummation or such
effective date, the stock and other securities and property
(including cash) to which such holder would have been entitled upon
such consummation or in connection with such dissolution, as the case
may be, if such holder had so exercised this Warrant, immediately
prior thereto, all subject to further adjustment thereafter as
provided in Section 4.
3.2. Dissolution. In the event of any dissolution of the
Company following the transfer of all or substantially all of its
properties or assets, the Company, prior to such dissolution, shall
at its expense deliver or cause to be delivered the stock and other
securities and property (including cash, where applicable) receivable
by the holders of the Warrants after the effective date of such
dissolution pursuant to this Section 3 to a bank or trust company
having its principal office in New York, NY, as trustee for the
holder or holders of the Warrants.
3.3. Continuation of Terms. Upon any reorganization,
consolidation, merger or transfer (and any dissolution following any
transfer) referred to in this Section 3.3, this Warrant shall
continue in full force and effect and the terms hereof shall be
applicable to the shares of stock and other securities and property
receivable on the exercise of this Warrant after the consummation of
such reorganization, consolidation or merger or the effective date of
dissolution following any such transfer, as the case may be, and
shall be binding upon the issuer of any such stock or other
securities, including, in the case of any such transfer, the person
acquiring all or substantially all of the properties or assets of the
Company, whether or not such person shall have expressly assumed the
terms of this Warrant as provided in Section 4. In the event this
Warrant does continue in full force and effect after the consummation
of the transaction described in this Section 3.3, then only in such
event will the Company's securities and property (including cash,
where applicable) receivable by the holders of the Warrants be
delivered to the Trustee as contemplated by Section 3.2.
4. Extraordinary Events Regarding Common Stock. In the event that
the Company shall (a) issue additional shares of the Common Stock as a
dividend or other distribution on outstanding Common Stock, (b) subdivide
its outstanding shares of Common Stock, or (c) combine its outstanding
shares of the Common Stock into a smaller number of shares of the Common
Stock, then, in each such event, the Purchase Price shall, simultaneously
with the happening of such event, be adjusted by multiplying the then
Purchase Price by a fraction, the numerator of which shall be the number of
shares of Common Stock outstanding immediately prior to such event and the
denominator of which shall be the number of shares of Common Stock
outstanding immediately after such event, and the product so obtained shall
thereafter be the Purchase Price then in effect. The Purchase Price, as so
adjusted, shall be readjusted in the same manner upon the happening of any
successive event or events described herein in this Section 4. The number
of shares of Common Stock that the holder of this Warrant shall thereafter,
on the exercise hereof as provided in Section 1, be entitled to receive
shall be increased to a number determined by multiplying the number of
shares of Common Stock that would otherwise (but for the provisions of this
Section 4) be issuable on such exercise by a fraction of which (a) the
numerator is the Purchase Price that would otherwise (but for the
provisions of this Section 4) be in effect, and (b) the denominator is the
Purchase Price in effect on the date of such exercise.
5. Certificate as to Adjustments. In each case of any adjustment
or readjustment in the shares of Common Stock (or Other Securities)
issuable on the exercise of the Warrants, the Company at its expense will
promptly cause its Chief Financial Officer or other appropriate designee to
compute such adjustment or readjustment in accordance with the terms of the
Warrant and prepare a certificate setting forth such adjustment or
readjustment and showing in detail the facts upon which such adjustment or
readjustment is based, including a statement of (a) the consideration
received or receivable by the Company for any additional shares of Common
Stock (or Other Securities) issued or sold or deemed to have been issued or
sold, (b) the number of shares of Common Stock (or Other Securities)
outstanding or deemed to be outstanding, and (c) the Purchase Price and the
number of shares of Common Stock to be received upon exercise of this
Warrant, in effect immediately prior to such adjustment or readjustment and
as adjusted or readjusted as provided in this Warrant. The Company will
forthwith mail a copy of each such certificate to the holder of the Warrant
and any Warrant agent of the Company (appointed pursuant to Section 10
hereof).
6. Reservation of Stock, etc. Issuable on Exercise of Warrant;
Financial Statements. The Company will at all times reserve and keep
available, solely for issuance and delivery on the exercise of the
Warrants, all shares of Common Stock (or Other Securities) from time to
time issuable on the exercise of the Warrant. This Warrant entitles the
holder hereof to receive copies of all financial and other information
distributed or required to be distributed to the holders of the Company's
Common Stock.
7. Assignment; Exchange of Warrant. Subject to compliance with
applicable Securities laws, this Warrant, and the rights evidenced hereby,
may be transferred by any registered holder hereof (a "Transferor") with
respect to any or all of the Shares. On the surrender for exchange of this
Warrant, with the Transferor's endorsement in the form of Exhibit B
attached hereto (the Transferor Endorsement Form") and together with
evidence reasonably satisfactory to the Company demonstrating compliance
with applicable Securities Laws, the Company at its expense but with
payment by the Transferor of any applicable transfer taxes) will issue and
deliver to or on the order of the Transferor thereof a new Warrant or
Warrants of like tenor, in the name of the Transferor and/or the
transferee(s) specified in such Transferor Endorsement Form (each a
"Transferee"), calling in the aggregate on the face or faces thereof for
the number of shares of Common Stock called for on the face or faces of the
Warrant so surrendered by the Transferor.
8. Replacement of Warrant. On receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation
of this Warrant and, in the case of any such loss, theft or destruction of
this Warrant, on delivery of an indemnity agreement or security reasonably
satisfactory in form and amount to the Company or, in the case of any such
mutilation, on surrender and cancellation of this Warrant, the Company at
its expense will execute and deliver, in lieu thereof, a new Warrant of
like tenor.
9. Registration Rights. The holder of this Warrant has been
granted certain registration rights by the Company. These registration
rights are set forth in a Subscription Agreement entered into by the
Company and Subscribers of the Company's Series D Preferred Stock at or
prior to the issue date of this Warrant. The terms of the Subscription
Agreement are incorporated herein by this reference. Upon the occurrence
of a Non-Registration Event as described in the Subscription Agreement, in
the event the Company is unable to issue Common Stock upon exercise of this
Warrant that has been registered in the Registration Statement described in
Section 10.1(iv) of the Subscription Agreement, which Registration
Statement must be effective throughout the exercise period of this Warrant,
then upon receipt by the Company of notice that the Holder of this Warrant
would exercise this Warrant but for the Company's inability to issue such
Common Stock upon exercise of this Warrant, then the Company will pay to
the Holder of this Warrant, in lieu of delivering Common Stock, a sum equal
to the closing ask price of the Company's Common Stock on NASD OTC Bulletin
Board or such other principal trading market for the Company's Common Stock
on the trading date immediately preceding the date notice is given by the
Holder, less the exercise price of this Warrant, for each share of Common
Stock designated in such notice from the Holder.
10. Warrant Agent. The Company may, by written notice to the each
holder of the Warrant, appoint an agent for the purpose of issuing Common
Stock (or Other Securities) on the exercise of this Warrant pursuant to
Section 1, exchanging this Warrant pursuant to Section 7, and replacing
this Warrant pursuant to Section 8, or any of the foregoing, and thereafter
any such issuance, exchange or replacement, as the case may be, shall be
made at such office by such agent.
11. Call Option. The Company shall have the option to "call" the
Warrants (the "Warrant Call"), in accordance with and governed by the
following:
(a) The Company shall exercise the Warrant Call by giving to
each Warrant Holder a written notice of call (the "Call Notice")
during the period in which the Warrant Call may be exercised.
(b) The Company's right to exercise the Warrant Call shall
commence with the Effective Date of the registration statement, as
defined in Section 10.1(iv) of the Subscription Agreement executed by
the parties contemporaneously herewith and, thereafter, shall be
coterminous with the exercise period of the Warrants for all or part
of the Common Stock issuable upon the exercise of the Warrants (the
"Warrant Shares"), provided, that the registration statement is
effective at the date the Call Notice is given and through the period
ending 14 business days thereafter. In no event may the Company
exercise the Warrant Call at any time unless the Warrant Shares to be
delivered upon exercise of the Warrant, will be upon delivery,
immediately resalable, without restrictive legend and upon such
resale freely transferable on the transfer books of the Company.
(c) Unless otherwise agreed to by the Warrant Holders, the
Call Notices must be given to all Warrant Holders in proportion to
the amounts of Common Stock which can be purchased by the respective
Warrant Holders in accordance with the respective Warrant held by
each.
(d) The Company may give Call Notices for up to 50% of the
Warrant Shares if the Company's Common Stock has traded at a price
equal to or in excess of two hundred percent (200%) of the Closing
Price for the twenty (20) consecutive trading days prior to the date
of the Call Notice.
(e) The Company may give Call Notices for up to 100% of the
Warrant Shares if the Company's Common Stock has traded at a price
equal to or in excess of two hundred fifty percent (250%) of the
Closing Price for the twenty (20) consecutive trading days prior to
the date of the Call Notice.
(f) The respective Warrant Holders shall exercise their
Warrant rights and purchase the appropriate Warrant Shares and pay
for same all within 14 business days of the date of the Call Notice.
12. Transfer on the Company's Books. Until this Warrant is
transferred on the books of the Company, the Company may treat the
registered holder hereof as the absolute owner hereof for all purposes,
notwithstanding any notice to the contrary.
13. Notices, etc. All notices and other communications from the
Company to the holder of this Warrant shall be mailed by first class
registered or certified mail, postage prepaid, at such address as may have
been furnished to the Company in writing by such holder or, until any such
holder furnishes to the Company an address, then to, and at the address of,
the last holder of this Warrant who has so furnished an address to the
Company.
14. Miscellaneous. This Warrant and any term hereof may be changed,
waived, discharged or terminated only by an instrument in writing signed by
the party against which enforcement of such change, waiver, discharge or
termination is sought. This Warrant shall be construed and enforced in
accordance with and governed by the laws of New York. Any dispute relating
to this Warrant shall be adjudicated in New York State. The headings in
this Warrant are for purposes of reference only, and shall not limit or
otherwise affect any of the terms hereof. The invalidity or
unenforceability of any provision hereof shall in no way affect the
validity or enforceability of any other provision.
IN WITNESS WHEREOF, the Company has executed this Warrant under seal
as of the date first written above.
China Peregrine Food Corporation
By:_______________________________
Roy G. Warren, President
Witness:
______________________________
Exhibit A
FORM OF SUBSCRIPTION
(To be signed only on exercise of Warrant)
TO: China Peregrine Food Corporation
The undersigned, the holder of the within Warrant, hereby irrevocably
elects to exercise this Warrant for, and to purchase thereunder, ________
shares of Common Stock of China Peregrine Food Corporation and herewith
makes payment of $________ therefor, and requests that the certificates for
such shares be issued in the name of, and delivered to _________________
whose address is __________________________________________.
The undersigned represents and warrants that all offers and sales by the
undersigned of the securities issuable upon exercise of the within Warrant
shall be made pursuant to registration of the Common Stock under the
Securities Act of 1933, as amended (the "Securities Act") or pursuant to an
exemption from registration under the Securities Act.
Dated:_____________________________
__________________________________
(Signature must conform to name of
holder as specified on the face of
the Warrant)
__________________________________
(Address)
Exhibit B
FORM OF TRANSFEROR ENDORSEMENT
(To be signed only on transfer of Warrant)
For value received, the undersigned hereby sells, assigns, and
transfers unto the person(s) named below under the heading "Transferees"
the right represented by the within Warrant to purchase the percentage and
number of shares of Common Stock of China Peregrine Food Corporation to
which the within Warrant relates specified under the headings "Percentage
Transferred" and "Number Transferred," respectively, opposite the name(s)
of such person(s) and appoints each such person Attorney to transfer its
respective right on the books of China Peregrine Food Corporation with full
power of substitution in the premises.
Percentage Number
Transferees Transferred Transferred
- ----------- ----------- -----------
Dated:________________, 19 ____
__________________________________
(Signature must conform to name of
holder as specified on the face of
the warrant)
Signed in the presence of:
________________________________ __________________________________
(Name) (address)
__________________________________
ACCEPTED AND AGREED: (address)
[TRANSFEREE]
_______________________________
(Name)
