UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY OR TRANSITIONAL REPORT
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2000
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
Commission File Number 0-20549
CHINA PREMIUM FOOD CORPORATION
(Exact name of registrant as specified in its amended charter)
Delaware 62-1681831
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11300 US Highway 1, North Palm Beach, Florida 33408 USA
(Address of principal executive offices)
(561) 625-1411
Registrant's telephone number
---------------------------------------------------------------------------
(Former name, former address and former fiscal year
if changed since last report)
Check whether the issuer
(1) filed all reports required to be filed by Section 13 or 15 (d) of the
Exchange Act during the past 12 months (or for such shorter period
that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes [X] No[ ]
The number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date is as follows:
Date Class Shares Outstanding
---- ----- ------------------
08/10/00 Common Stock 12,915,242
CHINA PREMIUM FOOD CORPORATION
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial statements F-1
Condensed balance sheets as of F-1
June 30, 2000 (unaudited) and December 31, 1999
Condensed statements of operations F-2
(unaudited) for the period ended June 30, 2000 and 1999
Condensed statements of cash flows F-3
(unaudited) for the period ended June 30, 2000 and 1999
Notes to condensed financial statements (unaudited) F-4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
PART II - OTHER INFORMATION
Item 2. Changes In Securities and Use of Proceeds
Item 6. Exhibits and reports on Form 8-K
SIGNATURES
EXHIBITS
CHINA PREMIUM FOOD CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, June 30,
1999 2000
------------ -----------
(Audited) (Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 16,854 $ 1,161,327
Note Receivable - 253,631
Prepaid expenses and other current assets 18,196 82,292
--------------------------
Total current assets 35,050 1,497,250
Property, plant and equipment, net 131,264 126,793
Investment in and advances to Meilijian 1,264,422 1,159,969
Goodwill 229,148 197,174
Licensing agreement, net 214,286 221,429
Deposit 10,000 10,000
--------------------------
Total assets $ 1,866,170 $3,212,615
==========================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of note payable 277,741 158,621
Accounts payable and accrued liabilities 250,833 106,892
Subscriptions in advance - 4,000
--------------------------
Total current liabilities 528,574 269,513
Dividend payable 370,039 236,490
Note payable, less current portion 127,500 191,250
--------------------------
Total liabilities 1,026,113 697,253
Shareholders' Equity:
Series A convertible preferred stock; par value
$0.001 per share, 500,000 shares authorized, 500,000
and 0 shares issued and outstanding at December 31,
1999 and June 30, 2000, respectively 500 -
Series B convertible, 9% cumulative, and redeemable
preferred stock; stated value $1.00 per share,
1,260,000 shares authorized, 1,260,000 and 242,559
shares issued and outstanding at December 31, 1999
and June 30, 2000, respectively 1,260,000 242,559
Series C convertible,8% cumulative and redeemable
preferred stock, stated value $3.00 per share , 14,904
and 0 shares issued and outstanding at December 31,
1999 and June 30, 2000, respectively 44,713 -
Series D convertible, 6% cumulative and redeemable
preferred Stock, stated value $10.00 per share,
76,250 and 105,000 shares issued and outstanding
at December 31, 1999 and June 30, 2000, respectively 762,500 1,040,000
Series F convertible, 6% cumulative and redeemable
preferred Stock, stated value $10.00 per share, 0
and 150,000 shares issued and outstanding at
December 31, 1999 and June 30, 2000, respectively - 1,480,000
Series G convertible, 7% cumulative and redeemable
preferred Stock, stated value $10.00 per share, 0
and 75,000 shares issued and outstanding at
December 31, 1999 and June 30, 2000, respectively - 675,000
Common stock; par value $0.001 per share, 20,000,000
shares authorized, 10,278,129 and 12,915,242 shares
issued and outstanding at December 31, 1999 and
June 30, 2000, respectively 10,278 12,915
Additional paid-in capital 11,256,952 14,544,111
Accumulated deficit (12,360,537) (15,344,972)
Accumulated other comprehensive loss - translation
adjustments (134,349) (134,251)
--------------------------
Total shareholders' equity 840,057 2,515,362
--------------------------
Total liabilities and shareholders' equity $ 1,866,170 $ 3,212,615
==========================
</TABLE>
See accompanying notes to financial statements.
CHINA PREMIUM FOOD CORPORATION
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
1999 2000 1999 2000
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Sales $ - $ - $ - $ -
Cost of goods sold - - - -
-----------------------------------------------------------
Gross margin (loss) - - - -
General and administrative expense 670,387 808,814 1,183,039 1,493,997
-----------------------------------------------------------
Loss from operations (670,387) (808,814) (1,183,039) (1,493,997)
Other expense:
Interest expense, net (1,409) (3,425) (5,224) (8,334)
Loss on investment in GFP (204,100) - (607,604) -
Loss on investment in Meilijian (36,637) (39,218) (78,235) (86,550)
-----------------------------------------------------------
Loss before income taxes (912,533) (851,457) (1,874,102) (1,588,881)
Income taxes - -
-----------------------------------------------------------
Net loss (912,533) (851,457) (1,874,102) (1,588,881)
Dividends accrued for Series B preferred stock (28,350) (5,458) (56,700) (33,808)
Dividends accrued for Series C preferred stock (3,559) - (9,003) (883)
Dividends paid and accrued for Series D preferred stock (652,453) (191,574) (654,504) (532,105)
Dividends paid and accrued for Series F preferred stock - (663,431) - (663,431)
Dividends paid and accrued for Series G preferred stock - (165,327) - (165,327)
-----------------------------------------------------------
Net loss applicable to common shareholders $(1,596,895) $(1,877,247) $(2,594,309) $(2,984,435)
===========================================================
Weighted average number of common shares outstanding 8,408,301 11,475,848 8,206,039 11,011,151
===========================================================
Loss per share $ (0.19) $ (0.16) $ (0.32) $ (0.27)
===========================================================
Comprehensive loss and its components
consist of the following:
Net loss applicable to common stock $(1,596,895) $(1,877,247) $(2,594,309) $(2,984,435)
Foreign currency translation adjustment (4,268) 751 (5,635) 98
-----------------------------------------------------------
Comprehensive loss $(1,601,163) $(1,876,496) $(2,599,944) $(2,984,338)
===========================================================
</TABLE>
See accompanying notes to financial statements.
CHINA PREMIUM FOOD CORPORATION
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Six Months Ended June 30,
----------------------------
1999 2000
---- ----
(Unaudited) (Unaudited)
<S> <C> <C>
Cash flows from operating activities
Net loss $(1,874,102) $(1,588,881)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 86,260 (87,640)
Issuance of stock for issuance cost 6,000 -
Compensation cost for stock option issued 48,563 -
Issuance of stock for consulting services 2,000 64,000
Issuance of stock for penalty expenses on Series D
preferred stock - 93,750
Loss on investment in GFP 607,604 -
Loss on investment in Meilijian 78,235 86,550
Increase (decrease) in cash from changes in:
Stock subscription receivable 235,000 -
Prepaid expenses (54,233) (64,096)
Deposits (5,000) -
Accounts payable and accrued liabilities 67,830 (45,455)
---------------------------
Net cash used in operating activities (801,843) (1,366,492)
---------------------------
Cash flows from investing activities
Advances to GFP (585,037) -
Advances to Meilijian (8,330) -
Notes receivable - (623,359)
Purchase of licensing agreement - (50,000)
Purchase of property and equipment (32,558) (10,837)
---------------------------
Net cash used in investing activities (625,925) (314,468)
---------------------------
Cash flows from financing activities
Proceeds of Series D Preferred stock 762,500 490,000
Proceeds of Section 4(2) private offering 472,199
Proceeds from stock warrants exercised 83,334
Repayment of note payable (70,722) (55,370)
Payment of finders' fees - (12,500)
Proceeds of Series F Preferred stock - 1,480,000
Proceeds of Series G Preferred stock - 675,000
Proceeds from exercise of stock options - 75,000
Proceeds from exercise of participation rights on Series E
preferred stock - 169,303
Proceeds from stock subscription - 4,000
---------------------------
Net cash provided by financing activities 1,247,311 2,825,433
---------------------------
Net increase (decrease) in cash and cash equivalents (180,457) 1,144,473
Cash and cash equivalents, beginning of period 305,233 16,854
---------------------------
Cash and cash equivalents, end of period $ 124,776 $ 1,161,327
===========================
Cash paid during the period:
Interest $ 10,528 $ 9,380
===========================
Supplemental disclosure of non-cash activities
Issuance of Series C preferred stock subscribed 135,000 -
Issuance of common stock subscribed 641,486 -
Licensing right acquired through assumption of note payable 300,000 -
Conversion of accrued services fees to common stock - 173,486
Accrued dividend 78,721 98,486
Conversion of Series A preferred stock to common stock - 500
Conversion of Series B preferred stock to common stock - 1,017,441
Conversion of Series C preferred stock to common stock 218,814 44,713
Conversion of Series D preferred stock to common stock - 212,500
Deemed dividend on Series D preferred stock - 500,000
Deemed dividend on Series F preferred stock - 642,181
Deemed dividend on Series G preferred stock - 164,015
Reversal of accrued dividends on preferred stock upon
conversion into common stock - 222,907
Effect of changes of exchange rate on investment in and
advances to GFP and Meilijian $ (5,632) $ 98
===========================
</TABLE>
See accompanying notes to financial statements.
CHINA PREMIUM FOOD CORPORATION
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(Information as of June 30, 2000 and for the six months ended June 30, 1999
and 2000, respectively, is unaudited)
1. Presentation of Interim Information
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Item 310
of regulation S-B. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements. The accompanying unaudited financial
statements reflect all adjustments that, in the opinion of the management,
are considered necessary for a fair presentation of the financial position,
results of operations, and cash flows for the periods presented. The
results of operations for such periods are not necessarily indicative of
the results expected for the full fiscal year or for any future period. The
accompanying financial statements should be read in conjunction with the
audited financial statements of the Company included in the Company's
Form 10-KSB for the year ended December 31, 1999.
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 and the Company changed to China
Peregrine Food Corporation. On February 1, 2000, the Company changed its
name to China Premium Food Corporation.
The Company owns equity interests in two joint ventures in China, 70% in
Green Food Peregrine Children's Food Co. Ltd. (GFP) and 52% in Hangzhou
Meilijian Dairy Products, Co. Ltd.(Meilijian). On January 3, 2000, the
Company commenced procedures to terminate GFP in accordance with the GFP
Joint Venture contract and Articles of Association. Accordingly, the
Company wrote off its investment in and advance to GFP as of December 31,
1999.
The Company's financial statements for the quarter ended June 30, 1999 have
been restated based on equity method. Prior financial statements were
prepared on a consolidation basis whereby the Company consolidated GFP and
Meilijian. Subsequent to issuing the 1998 financial statements, the Company
agreed with SEC's position that, despite its ownership of more than 50%
equity interest in each of these entities, the Company did not control
these entities due to the influence of the Chinese government owned
minority shareholders. As such, the Company agreed that the equity method
should be used to account for the Company's investment in these foreign
subsidiaries. The restatement did not have an impact on the previously
reported net loss for the quarter ended June 30, 1999.
2. Equity Transactions
On January 27, 2000, the Company received $75,000 in cash for issuance of
100,000 shares of its common stock pursuant to the exercise of options
granted in October 1999 to three non-employees, who are to provide advisory
and consulting services to the Company. These option agreements provide for
the issuance of a total of 1,016,000 shares of common stock pursuant to an
S-8 registration statement, filed October 9, 1999. These options expire on
October 17, 2000. Prior to January 27, 2000, 766,000 options were
exercised.
On February 1, 2000, the Company amended its Rule 506 offering with respect
to the Series D Preferred Stock originally offered on March 9, 1999 and
April 23, 1999, respectively. Pursuant to this amended offering, the
Company issued additional 50,000 shares of the Series D Preferred Stock and
received $490,000 in cash, net of $10,000 of legal and issuance expenses.
The Series D Preferred Stock has a Stated Value of $10.00 per share and the
same conversion feature disclosed before. The Company also issued warrants
for 1,300,000 shares of common stock to the existing holders of the
Company's Series D Preferred Stock. The warrants for 1,300,000 shares of
common stock have an exercise price of $0.625 per share and an expiration
date of January 31, 2003.
In connection with this sale, the Company issued 125,000 shares of its
common stock to such holders to compensate them for the delay in
registering the resale of the common stock underlying the Series D
Preferred and the warrants, and 50,000 shares of common stock to a finder.
These shares of common stock were valued at $0.75 per share, which was the
market value on February 1, 2000 for the Company's common stock.
In addition, Series D preferred stock entitles the holder to convert the
Series D preferred stock into the Company's common 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. 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 subscription agreement, Article 5. In accordance with the
Provisions of EITF 98-5, "Accounting for Convertible Securities with
Beneficial Conversion Features or Contingently Adjustable Commission
Ratios", the issuance of these units resulted in the Company being required
to record deemed dividends of $500,000 over the period from the date of
issuance to the date the preferred stock first becomes convertible. The
Company recognized $324,176 deemed dividend in the first quarter ended
March 31, 2000 and recognized the remaining $175,824 in the second quarter
ended June 30, 2000.
On February 7, 2000, the Company signed agreements with two non-employees
in exchange for the graphic design and legal services provided by these two
professionals to the Company, to issue a total of 131,314 shares of common
stock pursuant to a 1933 Act Form S-8 registration statement which will be
filed by the Company. The shares issued for these agreements are valued at
$0.75 per share, which was the market value of the Company's common stock
on February 7, 2000, the execution date of the agreements.
On April 6, 2000, the Company issued 6,374 share of its common stock at
$0.9413 per share to compensate the consulting service of $6000 provided by
The Omega Company pursuant to the terms of a written consulting agreement.
The principal of The Omega Company is Mr. Arthur Blanding, who has been a
member of the Company's Board of Directors since November of 1999. These
shares were issued pursuant to registration provided by Section 4(2) of
1933 Act.
On April 6, 2000, the Company issued 150,000 of its Series F Convertible
Preferred Stock and warrants for 4,600,000 shares of its common stock to
three sophisticated and accredited investors and one finder. In addition,
the Company agreed to issue 75,000 shares of common stock upon the exercise
of the warrants by the respective holders. The Series F Convertible
Preferred Stock and the warrants were priced at $10.00 per unit and
resulted in proceeds of $1,480,000, net of $20,000 of legal and issuance
expenses. The Series F Convertible Preferred Stock has a stated value of
$10.00 per share and a conversion feature equal to $0.50 per share.
Pursuant to the subscription agreement, the holders of Series F Preferred
Stock are subject to a maximum conversion feature that prohibits the
holders from converting their preferred stock into more than 9.99% of
outstanding common shares on the conversion date based upon the formula
specified in the subscription agreement, Article 9.3. Warrants for
3,000,000 shares of common stock were issued to the investors with an
exercise price of $1.00 per share and an expiration date of April 5, 2003.
Warrants for 1,600,000 shares of common stock were issued to a finder with
an exercise price of $0.84 per share and have an expiration date of April
5, 2003. The Series F Convertible Preferred Stock, the warrants and the
common stock underlying the Preferred and the warrants have been and will
be issued pursuant to an exemption to registration provided by Regulation
D, Rule 506 and Section 4(2) of the 1933 Act. The proceeds of this offering
are for working capital. In accordance with the Provisions of EITF 98-5,
"Accounting for Convertible Securities with Beneficial Conversion Features
or Contingently Adjustable Commission Ratios", the issuance of these units
resulted in the Company being required to record deemed dividends of
$642,181 for the quarter ended June 30, 2000.
On April 25, 2000, the Company issued 66,785 shares of its common stock to
Utah Resources, Inc. pursuant to the conversion of the Company's remaining
Series C Convertible Preferred Stock issued to Utah Resources in December
of 1998. The Series C Convertible Preferred Stock and the common stock
underlying the preferred stock were issued to Utah Resources pursuant to an
exemption to registration provided by Regulation D, Rule 504 and Section
4(2) of the 1933 Act.. Utah Resources, Inc. is an accredited and
sophisticated investor. No cash was received by the Company for these
shares.
On May 11, 2000, the Company issued 10,260 share of its common stock at
$0.7797 per share to compensate the consulting service of $8,000 provided
by The Omega Company pursuant to the terms of a written consulting
agreement. The principal of The Omega Company is Mr. Arthur Blanding, who
has been a member of the Company's Board of Directors since November of
1999. These shares were issued pursuant to registration provided by Section
4(2) of 1933 Act.
On May 22, 2000, the Company issued 184,638 shares of its common stock to
two holders of Series D Convertible Preferred Stock pursuant to the
conversion of 10,000 shares of the preferred. The Series D Convertible
Preferred and the common stock underlying the preferred were issued to
these sophisticated and accredited investors pursuant to an exemption from
registration provided by Regulation D, Rule 506 and Section 4(2) of the
1933 Act. No cash was received by the Company for these shares.
On May 23, 2000, the Company issued 1,517,441 shares of its common stock to
one holder, pursuant to the conversion of 500,000 shares of Series A
Convertible Preferred Stock and 1,017,441 shares of Series B Convertible
Preferred Stock. The Series A and Series B Convertible Preferred Stock
converted was issued by the Company in early 1997 to one of the original
"founders" of the Company pursuant to an exemption to registration provided
by Section 4(2) of the Act. The conversion of the Series A Convertible
Preferred Stock represents all of the Series A Convertible Preferred Stock
issued by the Company. No cash was received by the Company for these
shares.
On May 25, 2000, the Company issued 131,314 shares of its common stock to
two non-employees pursuant to written agreements with the Company, dated
February 7, 2000. The issuance of the stock was in exchange for a graphic
design and legal services provided by these two professionals to the
Company. Shares issued under these agreements are valued at $0.75 per
share, which was the market value of the Company's common stock on the date
of the execution of the agreements. These shares were issued pursuant to a
1933 Act Form S-8 registration statement. No cash was received by the
Company for these shares.
On June 8, 2000, the Company issued 219,566 shares of its common stock to
two holders of Series D Convertible Preferred Stock pursuant to the
conversion of 10,000 shares of the preferred. The Series D Convertible
Preferred and the common stock underlying the preferred were issued to
these sophisticated and accredited investors pursuant to an exemption from
registration provided by Regulation D, Rule 506 and Section 4(2) of the
1933 Act. No cash was received by the Company for these shares.
On June 19, 2000, the Company issued 75,000 shares of it's Series G
Convertible Preferred Stock and warrants for 344,330 shares at $0.9625 per
share to three investors and two finders. The recipients of the preferred
stock and the warrants are all sophisticated and accredited investors. The
Series G convertible Preferred Stock, the warrants and the common stock
underlying both the preferred and the warrants were issued pursuant to an
exemption to registration provided by Regulation D, Rule 506 and Section
4(2) of the 1933 Act. The Series G Convertible Preferred Stock and the
warrants were priced at $10.00 per unit and resulted in proceeds of
$675,000 in cash, net of $60,000 in finder's fees and $15,000 of legal and
issuance expenses. The Series G Convertible Preferred Stock has a stated
value of $10.00 per share and a conversion feature equal to the lesser of
$0.85 per share or 80% of the average of the three lowest closing bid
prices of the 22 days immediately preceding the conversion of the
preferred. The shares of Series G 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
subscription agreement, Article 5. The warrants for 334,330 shares of
common stock have an exercise price of $0.9625 per share and an expiration
date of June 18, 2003. The proceeds of this offering are for working
capital. In accordance with the Provisions of EITF 98-5, "Accounting for
Convertible Securities with Beneficial Conversion Features or Contingently
Adjustable Commission Ratios", the issuance of these units resulted in the
Company being required to record deemed dividends of $164,015 for the
quarter ended June 30, 2000.
3. Subsequent Events
On July 14, 2000, the Company issued 225,735 shares of its common stock to
former holders of the Company's Series E Convertible Preferred Stock. This
common stock was issued pursuant to the exercise of certain participation
rights in favor of such holders at a price determined by the market value
of such common stock on the day of exercise. The Company received
$169,302.50 in cash from the issuance of this common stock. The Common
Stock was issued by the Company pursuant to an exemption to registration
provided for the original Convertible Preferred transaction, and all shares
underlying that transaction, pursuant to Regulation D, Rule 506 and Section
4(2) of the 1933 Act. This stock was issued to fourteen accredited and
sophisticated investors, who were provided with updated financial and
corporate information through the Company's public filings.
In December 1999, the Shanghai government approved the registration of a
new wholly owned subsidiary in the Wai Gao Qiao "free trade zone" in
Shanghai, China. This import-export company was formed to import, export
and distribute food products on a wholesale level in China. In July of
2000, the Company capitalized this subsidiary in the amount of
approximately US$ 300,000. In addition, the Company has agreed to
contribute an additional amount of US $2,000,000 over a five year period,
commencing July 1, 2000. The Company will provide this additional capital
in tranches as collateral for loans in RMB by a Chinese bank to our
subsidiary. As the RMB loans are paid by the Company's subsidiary, the
collateral in US dollars will be released to the Company. By this method of
financing, the Company and its subsidiary will avoid the impact of
regulations governing the conversion of Chinese currency into US dollars
applicable in China. A foreign exchange bank has agreed to act as the
"facility" for these loan transactions. The Company's subsidiary will be
able to borrow up to 90% of the US dollar collateral at an exchange rate at
one point below the national rate.
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations - Six Months Ended June 30, 2000
Prior to the year ending December 31, 1999, the Company reported its
financial affairs and those of its Chinese subsidiaries on a consolidated
basis. In connection with prior filings with the Securities and Exchange
Commission, the Company received comments from the Commission's reviewing
staff that these financial matters should be reported on an equity method
basis rather than a consolidated basis. The Company has been advised by the
Commission's staff reviewer to report its financial affairs utilizing the
equity method. In order to expedite the process of the review of the
filings in question, the Company has made the strategic decision not to
seek a further review of the Commission's staff reviewer's conclusions.
Accordingly, the Company has restated its prior year financial statements
as presented in its 10-KSB filing for the year ending December 31, 1999, as
well as in its 10Q filings for the quarters ended March 31, 2000 and June 30,
2000, on the equity method basis.
RESULTS OF OPERATIONS
Financial Condition June 30, 2000
---------------------------------
As of June 30, 2000, the Company had an accumulated deficit of
$15,344,972. As of June 30, 2000, 2000, the Company had cash on hand of
$1,161,327 and reported total shareholders' equity of $2,515,362.
For this same period of time, general and administrative expenses
were $1,493,997. The continued increase in these expenses from prior
periods is a result of intensified activities in establishing a refocused
business base in China. After interest expenses of $8,334 and the loss on
the Company's investment in its Hangzhou Meilijian subsidiary of $86,550,
the Company had a net loss of $1,588,881.
Six Months Ended June 30, 2000, Compared to
-------------------------------------------
Six Months Ended June 30, 1999
------------------------------
The Company's net loss decreased approximately 18% to $1,588,881 in
2000 from $1,874,102 in 1999. The Company reported a loss per share of
$0.32 in 1999 and $0.27 in 2000. The decrease in the loss per share was due
to
* the write off of the Company's investment in Green Food Peregrine
as of December 31, 1999 - the investment loss was $607,604 for
the six months ended June 30, 1999
* increase in number of shares of common stock outstanding as of
June 30, 2000.
Accrued and paid dividends increased approximately 94% to $1,395,554 in
2000 from $720,207 in 1999. This increase was the result of deemed dividends
associated with the conversion features of two additional classes of
convertible preferred stock issued in the quarter ended June 30, 2000. The
Company realized net proceeds of $2,155,000 from the sale of these two
series of convertible preferred stock.
As of June 30, 2000 there were 12,915,242 shares of common stock
outstanding compared with 10,278,129 shares of common stock outstanding as
of June 30, 1999. Due to the timing of issuance of new shares, however, the
weighted average number of shares of common stock outstanding in 2000 was
11,011,151. The loss per share in 2000 decreased by approximately 19%
compared with 1999.
General and administrative expenses increased by approximately 26% to
$1,493,997 in 2000 from $1,183,039 in 1999. This increase reflects the
costs associated with the establishment and funding of the day to day
operations new businesses in China including
* an import/export company in Shanghai's Free Trade Zone
* the development of software and graphic design associated with a
business to business e-commerce food distribution portal
* the development of logistics capabilities for the launch of
Looney Tunes(TM) branded milk products and snack crackers in
Shanghai and surrounding areas
In addition, general and administrative expenses increased as a
result of legal and accounting expenses associated with the restatement of
the Company's financial statements on the equity basis, fund raising
exercises activities, and the preparation and filing of SEC reporting
documents by the Company.
Three Months Ended June 30, 2000 Compared to
--------------------------------------------
Three Months Ended June 30, 1999
--------------------------------
The Company's net loss decreased approximately 7% to $851,457 in 2000
from $912,533 in 1999. The Company reported a loss per share of $0.19 in
1999 and $0.16 in 2000. The decrease in the loss per share was due to
* the write off of the Company's investment in Green Food Peregrine
as of December 31, 1999 - the investment loss was $204,100 for
the six months ended June 30, 1999
* increase in number of shares of common stock outstanding as of
June 30, 2000.
Accrued and paid dividends increased approximately 50% to $1,025,790 in
2000 from $684,362 in 1999. This increase was the result of deemed dividends
associated with the conversion features of two additional classes of
convertible preferred stock issued in the quarter ended June 30, 2000. The
Company realized net proceeds of $2,155,000 from the sale of these two
series of convertible preferred stock.
General and administrative expenses increased by approximately 21% to
$808,814 in 2000 from $670,387 in 1999. This increase reflects the costs
associated with the establishment and funding of the day to day operations
new businesses in China including
* an import/export company in Shanghai's Free Trade Zone
* the development of software and graphic design associated with a
business to business e-commerce food distribution portal
* the development of logistics capabilities for the launch of
Looney Tunes(TM) branded milk products and snack crackers in
Shanghai and surrounding areas
In addition, general and administrative expenses increased as a
result of legal and accounting expenses associated with the restatement of
the Company's financial statements on the equity basis, fund raising
exercises activities, and the preparation and filing of SEC reporting
documents by the Company.
Losses on investment in the Company's Hangzhou Meilijian subsidiary
increased approximately 11% to $86,550 in 2000 from $78,235 in 1999. The
increase reflected the result of high level of selling and general and
administrative expenses associated with the continuing attempts to
penetrate the market and the introduction of new products in Hangzhou.
Gross profit for the this period was $650,860 with revenues of $2,976,488.
As a percentage of sales, the cost of sales was 78% for this period.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1999, the Company reported that net cash used in
operating activities was $801,843, net cash used in investing activities
was $625,925, and net cash provided by financial activities was $1,247,311.
As of June 30, 2000, net cash used in operating activities was
$1,366,492, net cash used in investing activities was $314,468, and net
cash provided by financing activities was $2,825,433.
Net cash used in operating activities increased approximately 70% to
$1,366,492 from $801,843 of net cash used by operating activities in 1999.
The increase in negative cash flow in operating activities reflects the
increased costs experienced during this period associated with the
establishment and funding of the day to day operations new businesses in China
and supporting the U.S. operations of the Company.
Net cash used in investing activities decreased approximately 99% to
$314,468 in 2000 from $625,925 in 1999. The decrease mainly was due to
advances made to China Premium Food Corporation (Shanghai) Co., Inc., the
Company's wholly owned import/export Chinese company and to Mandarin Fine
Food to purchase inventory.
Net cash provided by financing activities increased 126% to $2,825,433
in 2000 from $1,247,311 in 1999. The increased necessity for fund raising
activities resulted from the establishment and funding of the day to day
operations of new businesses in China and the United States, and supporting
the U.S. management operations of the Company.
During the first and second quarters of 2000, ending June 30, 2000,
the Company continued to shift its business focus and strategy from the
production of milk products to position itself as a Company involved in the
marketing and distribution of a broad range of food products in China and
the United States, including premium branded items. In China, these
efforts are through China Premium Food (Shanghai) Co., Inc., the Company's
wholly owned import/export/distribution subsidiary. China Premium (Shanghai)
will import and distribute Looney Tunes(tm) snack crackers and distribute
Looney Tunes(tm) milk products in the greater Shanghai area. In the United
States, Bravo! Food, Inc., a subsidiary, will promote and market Looney
Tunes(tm) milk products.
In February of 2000, the Company announced an agreement in principle
to acquire the majority equity interest in and control of the operations of
Mandarin Fine Foods Company of Beijing and Shanghai. Mandarin is the
dominant distributor of premium food products to four and five star hotels
throughout China. Mandarin's customers include most of the finest hotels in
China and many top restaurants in Beijing and Shanghai, the two largest and
most advanced cities in China. The bulk of Mandarin's $8 million dollar
sales volume is derived from eight product categories, most of which are
imported from outside China. Mandarin is the largest importer of prime,
aged, U.S. beef to China and represents approximately 60% of all premium
U.S. beef exported to China. Additional products include dairy and cheese,
Italian food dry goods, caviar, smoked salmon, oysters, various other meat
products and seafood, and several pastry and dessert foods. Currently,
Mandarin processes its caviar in China, utilizing local Sturgeon, and
produces its own "fresh" pasta in China. On May 11, 2000, the Company
executed a definitive agreement for the acquisition of Mandarin.
During the course of the due diligence for the Mandarin transaction,
we became aware that our acquisition of Mandarin would significantly limit
the scope of its business license under PRC regulations concerning Foreign
Investment Enterprises. We also became aware, however, of an agricultural
development program funded by the national government in the Western China
Shaanxi Province, known as the Yangling Model District for Agricultural
High-tech and New-tech Industry. Through this program, the government of
Shaanxi Province is authorized to issue business licenses which are much
broader in scope than normal to new companies in the Yangling Model
District, including foreign investment joint ventures.
Owing to the greatly enhanced scope of the business license offered
in the Yangling District, we agreed with Mr. Li Zhi Yun, the sole owner of
Mandarin Fine Foods, to forego the purchase of Mandarin Fine Foods in favor
of establishing a new joint venture company in Yangling. We agreed that the
parties to this joint venture would be China Premium Food Corporation, as
the foreign party, and Yangling Kechuang Agricultural Techniques
Development Co., a new Chinese company established by Mr. Li in the
Yangling District, as the Chinese party. The new joint venture will be
named "Yangling Mandarin Premium Food Company, Ltd.". The stated purpose
of Yangling Mandarin will be to establish an enterprise in Yangling Model
District for Agricultural High-tech and New-tech Industry, to produce and
distribute food and beverages, to develop domestic markets for such
products, to set up a domestic production base to strengthen its position
in the distribution market. As part of this transaction, Mr. Li has agreed
to liquidate Mandarin Fine Foods.
Going forward, the Company's primary requirements for cash consist of
* the capital contribution required for the Yangling Mandarin
new joint venture
* expenses related to the development of the distribution
business infrastructure for Yangling Mandarin
* expenses related to the development of the e- commerce
business infrastructure for Yangling Mandarin
* additional working capital for the day to day operation of
China Premium (Shanghai)
* product development, marketing and advertising for the
marketing and sales of our Looney Tunes(tm) milk products in
China
* expenses related to the development of the distribution
infrastructure for China Premium (Shanghai) for Looney
Tunes(tm) flavored milks and snack crackers
* payments of guaranteed royalty payments to Warner Bros. under
existing licensing agreements
* additional working capital for our day to day operation of the
Company's U.S. subsidiary Bravo! Foods, Inc.
We estimate that approximately US $2,000,000 will be needed to fund
these activities through the end of 2000. We anticipate the sale of
additional equity under commitments built into the Series D and Series G
Convertible Preferred transactions. In addition, we have commenced
discussions with representatives of the Series D, F and G investors
concerning the establishment of an equity line of credit with a present
bank investor for future funding.
In addition to these anticipated expenses, the Company currently has
monthly working capital needs of $140,000. This represents a significant
reduction resulting from the commencement of joint venture termination
procedures and the elimination of the funding of Green Food Peregrine. The
Company anticipates contributions to overhead to begin by the end of the
third quarter of this year due to product launches involving the Looney
Tunes(tm) brand in China.
On April 7, 2000, the Company received gross proceeds approximating
$1,500,000 to fund its working capital and investment capital needs.
through the issuance of its Series F Convertible Preferred Stock. These
funds represent the first of a series of investments that are planned and
structured in the form of 3,000,000 stock warrants and 1,600,000 stock
warrants at $1.00 and $0.84 exercise prices, respectively. These warrants
are callable when our shares trade at $1.60 and $2.40, respectively,
thereby enabling the Company to force the exercise and resultant additional
investment of $4,344,000 at an average exercise price of $.94.
In addition, on June 19, 2000, the Company received gross proceeds of
$750,000 to fund its working capital and investment capital needs, through
the issuance of its Series G Convertible Preferred Stock. The Series G
subscription agreement provides for the mandatory investment of an
additional $750,000 upon the effectiveness of an amended SB-2 registration
statement filed with the SEC covering this preferred and the underlying
common stock.
DEBT STRUCTURE
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 $203,362 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. This note currently is being renegotiated to
extend the time for payment.
EFFECTS OF INFLATION
The Company believes that inflation has not had material effect on
its net sales and results of operations.
EFFECT OF FLUCTUATION IN FOREIGN EXCHANGE RATES
The Company's operating subsidiary, Green Food Peregrine, is located
in China. It buys and sells products in China using Chinese renminbi as
functional currency. Based on Chinese government regulation, all foreign
currencies under the category of current account are allowed to freely
exchange with hard currencies. During the past two years of operation,
there were no significant changes in exchange rates. However, there is no
assurance that there will be no significant change in exchange rates in the
near future.
NEW ACCOUNTING STANDARDS NOT ADOPTED YET
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, 2000.
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 to affect its
financial statements.
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
On April 6, 2000, the Company issued 6,374 shares of its common stock
to The Omega Company, pursuant to a written consulting contract. The
principal of The Omega Company is Mr. Arthur Blanding, who has been a
member of the Company's Board of Directors since November of 1999. These
shares were issued pursuant to an exemption to registration provided by
Section 4(2) of the 1933 Act. No cash was received by the Company for these
shares.
On April 6, 2000, the Company issued 150,000 of its Series F
Convertible Preferred Stock and warrants for 4,600,000 shares of its common
stock to three sophisticated and accredited investors and one finder. In
addition, the Company agreed to issue 75,000 shares of common stock upon
the exercise of the warrants by the respective holders. The Series F
Convertible Preferred Stock and the warrants were priced at $10.00 per unit
and resulted in proceeds of $1,480,000, net of $20,000 of legal and
issuance expenses. The Series F Convertible Preferred Stock has a stated
value of $10.00 per share and a conversion feature equal to $0.50 per
share. Warrants for 3,000,000 shares of common stock were issued to the
investors with an exercise price of $1.00 per share and an expiration date
of April 5, 2003. Warrants for 1,600,000 shares of common stock were issued
to a finder with an exercise price of $0.84 per share and have an
expiration date of April 5, 2000. The Series F Convertible Preferred
Stock, the warrants and the common stock underlying the Preferred and the
warrants have been and will be issued pursuant to an exemption to
registration provided by Regulation D, Rule 506 and Section 4(2) of the
1933 Act. The proceeds of this offering are for working capital.
On April 25, 2000, the Company issued 66,785 shares of its common
stock to Utah Resources, Inc. pursuant to the conversion of the Company's
remaining Series C Convertible Preferred Stock issued to Utah Resources in
December of 1998. The Series C Convertible Preferred Stock and the common
stock underling the preferred were issued to Utah Resources pursuant to an
exemption to registration provided by Regulation D, Rule 504 and Section
4(2) of the 1933 Act.. Utah Resources, Inc. is an accredited and
sophisticated investor. No cash was received by the Company for these
shares.
On May 11, 2000, the Company issued 10,260 shares of its common stock
to The Omega Company pursuant to the terms of a written consulting
contract. No cash was received by the Company for these shares.
On May 22, 2000, the Company issued 184,638 shares of its common
stock to two holders of Series D Convertible Preferred Stock pursuant to
the conversion of 10,000 shares of the preferred. The Series D Convertible
Preferred and the common stock underlying the preferred were issued to
these sophisticated and accredited investors pursuant to an exemption from
registration provided by Regulation D, Rule 506 and Section 4(2) of the
1933 Act. No cash was received by the Company for these shares.
On May 23, 2000, the Company issued 1,517,441 shares of its common
stock to one holder, pursuant to the conversion of 500,000 shares of Series
A Convertible Preferred Stock and 1,017,441 shares of Series B Convertible
Preferred Stock. The Series A and Series B Convertible Preferred Stock
converted was issued by the Company in early 1997 to one of the original
"founders" of the Company pursuant to an exemption to registration provided
by Section 4(2) of the Act. The conversion of the Series A Convertible
Preferred Stock represents all of the Series A Convertible Preferred Stock
issued by the Company. No cash was received by the Company for these
shares.
On May 25, 2000, the Company issued 131,314 shares of its common
stock to two non-employees pursuant to written agreements with the Company,
dated February 7, 2000. The issuance of the stock was in exchange for a
graphic design and legal services provided by these two professionals to
the Company. Shares issued under these agreements are valued at $0.75 per
share, which was the market value of the Company's common stock on the date
of the execution of the agreements. These shares were issued pursuant to a
1933 Act Form S-8 registration statement. No cash was received by the
Company for these shares.
On June 8, 2000, the Company issued 219,566 shares of its common
stock to two holders of Series D Convertible Preferred Stock pursuant to
the conversion of 10,000 shares of the preferred. The Series D Convertible
Preferred and the common stock underlying the preferred were issued to
these sophisticated and accredited investors pursuant to an exemption from
registration provided by Regulation D, Rule 506 and Section 4(2) of the
1933 Act. No cash was received by the Company for these shares.
On June 19, 2000, the Company issued 75,000 shares of it's Series G
Convertible Preferred Stock and warrants for 344,330 shares at $0.9625 per
share to three investors and two finders. The recipients of the preferred
stock and the warrants are all sophisticated and accredited investors. The
Series G convertible Preferred Stock, the warrants and the common stock
underlying both the preferred and the warrants were issued pursuant to an
exemption to registration provided by Regulation D, Rule 506 and Section
4(2) of the 1933 Act. The Series G Convertible Preferred Stock and the
warrants were priced at $10.00 per unit and resulted in proceeds of
$675,000 in cash, net of $60,000 in finder's fees and $15,000 of legal and
issuance expenses. The Series G Convertible Preferred Stock has a stated
value of $10.00 per share and a conversion feature equal to the lesser of
$0.85 per share or 80% of the average of the three lowest closing bid
prices of the 22 days immediately preceding the conversion of the
preferred. The warrants for 334,330 shares of common stock have an
exercise price of $0.9625 per share and an expiration date of June 18,
2003. The proceeds of this offering are for working capital.
Subsequent Events
On July 14, 2000, the Company issued 225,735 shares of its common
stock to former holders of the Company's Series E Convertible Preferred
Stock. This common stock was issued pursuant to the exercise of certain
participation rights in favor of such holders at a price determined by the
market value of such common stock on the day of exercise. The Company
received $169,302.50 in cash from the issuance of this common stock. The
Common Stock was issued by the Company pursuant to an exemption to
registration provided for the original Convertible Preferred transaction,
and all shares underlying that transaction, pursuant to Regulation D, Rule
506 and Section 4(2) of the 1933 Act. This stock was issued to fourteen
accredited and sophisticated investors, who were provided with updated
financial and corporate information through the Company's public filings.
In December 1999, the Shanghai government approved the registration
of a new wholly owned subsidiary in the Wai Gao Qiao "free trade zone" in
Shanghai, China. This import-export company was formed to import, export
and distribute food products on a wholesale level in China. In July of
2000, the Company capitalized this subsidiary in the amount of
approximately US$ 300,000. In addition, the Company has agreed to
contribute an additional amount of US $2,000,000 over a five year period,
commencing July 1, 2000. The Company will provide this additional capital
in tranches as collateral for loans in RMB by a Chinese bank to our
subsidiary. As the RMB loans are paid by the Company's subsidiary, the
collateral in US dollars will be released to the Company. By this method of
financing, the Company and its subsidiary will avoid the impact of
regulations governing the conversion of Chinese currency into US dollars
applicable in China. A foreign exchange bank has agreed to act as the
"facility" for these loan transactions. The Company's subsidiary will be
able to borrow up to 90% of the US dollar collateral at an exchange rate at
one percent below the national rate.
Exhibits and Reports on Form 8-K
(a) Exhibits - Required by Item 601 of Regulation S-B.
(4) Certificate of Designation Series G Convertible Preferred
Stock
(27) Financial data schedule
(b) Reports on Form 8-K
none
SIGNATURES
In accordance with the requirements of the Exchange Act of 1934, the
registrant caused this report to be signed on its behalf of the
undersigned, duly authorized.
CHINA PREMIUM FOOD CORPORATION
(Registrant)
Date: August 14, 2000 /s/Roy G. Warren
------------------------------------
Roy G. Warren, President
