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 September 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
---- ----- ------------------
11/14/00 Common Stock 12,939,880
CHINA PREMIUM FOOD CORPORATION
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial statements F-1
Consolidated balance sheet as of F-1
September 30, 2000 (unaudited) and December 31, 1999
Consolidated statements of operations F-2
(unaudited) for the period ended
September 30, 2000 and 1999
Consolidated of cash flows F-3
(unaudited) for the period ended
September 30, 2000 and 1999
Notes to consolidated financial statements (unaudited) F-5
Item 2. Management's Discussion and Analysis of Financial 8
Condition and Results of Operations
PART II - OTHER INFORMATION
Item 2. Changes In Securities and Use of Proceeds 13
Item 6. Exhibits and reports on Form 8-K 14
SIGNATURES 14
EXHIBITS
CHINA PREMIUM FOOD CORPORATRION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, September 30,
1999 2000
------------ -------------
(Audited) (Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash $ 16,854 $ 86,012
Restricted cash (Note 2) - 86,000
Accounts receivable - 8,696
Note receivable (Note 3) - 209,654
Other receivable - 37,591
Advance to vendors - 81,201
Inventory - 81,379
Prepaid expenses 18,196 95,190
Deposits 10,000 10,000
-----------------------------
Total current assets 45,050 695,723
Property, plant and equipment, net 131,264 165,363
Investment in and advances to Meilijian, net 1,246,422 1,044,118
Goodwill 229,148 181,187
Licensing agreement, net 214,286 637,500
-----------------------------
Total assets $ 1,866,170 $ 2,723,891
=============================
Liabilities and Shareholders' Equity
Current liabilities:
Bank loans in Shanghai (Note 2) $ - $ 76,089
Note payable - International Paper (Note 4) 277,741 202,743
Note payable - Warner Bros. (Note 5) 127,500 620,000
Accounts payable and accrued liabilities 250,833 199,601
Dividends payable 370,039 219,558
-----------------------------
Total current liabilities 1,026,113 1,317,991
Commitments and contingencies
SHAREHOLDERS' EQUITY (NOTES 6 AND 7)
Series A convertible preferred stock; par value
$0.001 per share, 500,000 authorized, 500,000
shares issued and outstanding 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 1,260,000 242,559
Series C convertible,8% cumulative and redeemable
preferred stock, stated value $3.00 per share ,
47,723 and 0 shares issued and outstanding 44,713 -
Series D convertible, 6% cumulative and redeemable
preferred stock, stated value $10.00 per share,
80,250 and 109,000 shares issued and outstanding 762,500 1,048,158
Series F convertible, 6% cumulative and redeemable
preferred stock, stated value $10.00 per share, 0
and 150,000 shares issued and outstanding - 1,393,653
Series G convertible, 7% cumulative and redeemable
preferred stock, stated value $10.00 per share, 0
and 75,000 shares issued and outstanding - 662,453
Common stock; par value $0.001 per share, 20,000,000
shares authorized, 10,278,129 and 12,939,880 shares
issued and outstanding 10,278 12,940
Additional paid-in capital 11,256,952 14,471,851
Accumulated deficit (12,360,537) (16,291,486)
Translation adjustments (134,349) (134,228)
-----------------------------
Total shareholders' equity 840,057 1,405,900
-----------------------------
Total liabilities and shareholders' equity $ 1,866,170 $ 2,723,891
=============================
</TABLE>
See accompanying notes to consolidated financial statements.
CHINA PREMIUM FOOD CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
1999 2000 1999 2000
---- ---- ---- ----
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Sales $ - $ 57,716 $ - $ 57,716
Cost of goods sold - 10,208 - 10,208
--------------------------------------------------------
Gross profit - 47,508 - 47,508
Selling expense - 61,890 - 151,890
General and administrative expense 553,747 845,311 1,736,786 2,342,003
--------------------------------------------------------
Loss from operations (553,747) (895,693) (1,736,786) (2,446,385)
Other expense:
Interest expense, net (7,343) (6,775) (12,567) (13,122)
Loss on investment in GFP (217,898) - (825,502) -
Loss on investment in Meilijian (87,325) (82,476) (165,560) (202,305)
Other expense (income), net - (76,987) - (76,987)
--------------------------------------------------------
Loss before income taxes (866,313) (1,025,931) (2,740,415) (2,738,799)
Income taxes - - - -
--------------------------------------------------------
Net loss (866,313) (1,025,931) (2,740,415) (2,738,799)
Dividends accrued for Series B preferred stock (28,350) (5,458) (85,050) (39,266)
Dividends accrued for Series C preferred stock (2,931) - (11,934) (883)
Dividends accrued for Series D preferred stock (48,188) (16,350) (702,692) (548,455)
Dividends accrued for Series E preferred stock (113,156) - (113,156) -
Dividends accrued for Series F preferred stock - (22,500) - (444,255)
Dividends accrued for Series G preferred stock - (13,125) - (159,292)
--------------------------------------------------------
Net loss applicable to common shareholders $(1,058,938) $(1,083,364) $(3,653,247) $(3,930,950)
========================================================
Loss per share $ (0.12) $ (0.08) $ (0.43) $ (0.34)
========================================================
Weighted average number of common
Shares outstanding 8,798,735 12,929,935 8,405,775 11,703,512
========================================================
Comprehensive loss and its components:
Net loss $ (866,313) $(1,025,931) $(2,740,415) $(2,738,799)
Foreign currency translation adjustment (121) 22 (5,756) 121
--------------------------------------------------------
Comprehensive loss $ (866,434) $(1,025,909) $(2,746,171) $(2,738,678)
========================================================
</TABLE>
See accompanying notes to consolidated financial statements.
CHINA PREMIUM FOOD CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
September 30,
---------------------------
1999 2000
---- ----
(Unaudited) (Unaudited)
<S> <C> <C>
Cash flows from operating activities
Net loss $(2,740,415) $(2,738,799)
Adjustments to reconcile net loss to net cash
Provided by (used in) operating activities:
Depreciation and amortization 129,896 199,145
Compensation expense - stock option 48,563 -
Issuance of common stock in exchange for services 12,000 118,486
Issuance of common stock for penalty expenses - 37,500
Issuance of common stock for performance bonus - 15,000
Investment loss - GFP 825,502 -
Investment loss - Meilijian 165,560 202,304
Increase (decrease) from changes in:
Restricted cash - (86,000)
Accounts receivable - (8,696)
Other receivable - (37,591)
Note Receivable - (209,654)
Advance to vendors - (81,201)
Inventory - (81,379)
Deposit (5,000) -
Prepaids and other assets (6,596) (76,994)
Accrued liabilities 46,197 42,518
---------------------------
Net cash used in operating activities (1,524,293) (2,705,361)
---------------------------
Cash flows from investing activities
Purchase of fixed assets (41,392) (58,497)
Purchase of licensing rights from WB (300,000) (550,000)
Advance to Meilijian (8,330) -
Advance to GFP (862,588) -
---------------------------
Net cash used in investing activities (1,212,310) (608,497)
---------------------------
Cash flows from financing activities
Proceeds of Series D Preferred stock 762,500 490,000
Proceeds of Series E Preferred stock 711,963 -
Proceeds of Series F Preferred stock - 1,480,000
Proceeds of Series G Preferred stock - 675,000
Proceeds from issuance of common stock 537,200 244,303
Proceeds from warrants exercised 83,334 -
Borrowing from bank loan - 76,089
Repayment of note payable (121,298) (82,498)
Borrowing from note payable 300,000 500,000
Proceeds from stock subscription 235,000 -
---------------------------
Net cash provided by financing activities 2,508,699 3,382,894
---------------------------
Effect of exchange rate changes on cash - 122
---------------------------
Net increase (decrease) in cash and cash equivalents (227,904) 69,158
Cash and cash equivalents, beginning of period 305,233 16,854
---------------------------
Cash and cash equivalents, end of period $ 77,329 $ 86,012
===========================
Cash paid during the period:
Interest $ 18,129 $ 9,380
Income taxes - -
===========================
Supplemental disclosure of non-cash activities:
Conversion from Preferred Stock A to Common Stock - 500
Conversion from Preferred Stock B to Common Stock - 1,017,441
Conversion from Preferred Stock C to Common Stock 241,837 44,713
Conversion from Preferred Stock D to Common Stock - 204,342
Conversion from Preferred Stock E to Common Stock 237,321 -
Stock Subscribed 135,000 -
Deemed dividend 788,804 -
Deemed dividends Preferred Stock D - 500,000
Deemed dividends Preferred Stock F - 400,405
Deemed dividends Preferred Stock G - 144,854
Conversion of accrued consulting
service fees to Common Stock - 93,750
Elimination of accrued dividends upon conversion - 297,274
Accrued Dividend 124,028 146,793
Translation Adjustment - 121
</TABLE>
See accompanying notes to consolidated financial statements.
CHINA PREMIUM FOOD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Organization and Business
China Premium Food Corporation (the Company) was incorporated under the
laws of the State of Delaware on April 26, 1996.
The Company and its subsidiaries, Hangzhou Meilijian (Meilijian), China
Premium Food (Shanghai) Co. Ltd. and Bravo! Foods, Inc. are engaged in the
co-production, marketing and distribution of branded dairy and snack food
products in the People's Republic of China and the United States.
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.
In December 1999, the Company obtained Chinese government approval for the
registration of China Premium Food (Shanghai) Co. Ltd., a wholly owned
subsidiary, in the Wai Gao Qiao "free trade zone" in Shanghai, China. This
subsidiary was formed to import, export and distribute food products and
market and distribute branded dairy products and snack foods on a wholesale
level in China. In December 1999, the Company formed Bravo! Foods in
Delaware, a wholly owned subsidiary, to market and distribute branded dairy
products in the United States. Both of these subsidiaries market and
distribute branded milk products through supply contracts or production
agreements with regional dairy processors. The interim financial statements
include the financial information regarding these two entities.
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
adopted SFAS 94 and EITF No. 96-16 and changed the consolidation approach
to equity method to present its investment in GFP and Meilijian. The
restatement did not have an impact on the previously reported net loss for
the quarter ended June 30, 1999.
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 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 and nine-month period ended September 30, 2000 are not necessarily
indicative of the results that may be expected for the year ending December
31, 2000. 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, 1999.
Note 2 - Restricted Cash and Bank Loans in Shanghai
In September 2000, the Company wired $86,000 to a Chinese commercial bank
in Shanghai as collateral to borrow RMB loans from the bank. With the
$86,000 of time deposit as collateral, the bank agreed to loan China
Premium (Shanghai) the maximum RMB amount not to exceed 90% of the value of
certificate of deposit. The bank loans bear interest at 6.435% per annum
and mature on September 11, 2001 for RMB110,000 (equivalent of US$13,253)
and on October 20, 2001 for RMB520,000 (equivalent of US$62,650). The
proceeds of RMB loans from the bank can be used only for purchasing
inventory.
Note 3 - Note Receivable
During the process to acquire a majority equity interest in Mandarin Fine
Foods Co. Ltd., the Company loaned $251,857.28 to Mr. Zhiyun Li, the owner
of Mandarin Fine Foods, on May 26, 2000. The note bears interest at 8% per
annum and matured on June 30, 2000 with a conversion feature that
allowed the Company to convert the note to 3.148% of equity interest in
Mandarin. On August 30, 2000, Mr. Li made a payment of $48,946 and on
November 1, 2000, Mr. Li made another payment of $50,000. The Company
believes that the outstanding note receivable of 209,654 (including accrued
interest of approximately $6,700), as of September 30, 2000, will be fully
recoverable.
Note 4 - Extension of Note Payable to International Paper
The note of $158,621 as of June 30 2000 payable to International Paper was
due on July 15, 2000. The Company negotiated with International paper for
the extension of this note. On July 6, 2000, International Paper agreed to
extend the note to July 1, 2001, the principal amount was adjusted to
$155,743 due to different interest calculation approach. International
Paper imposed a charge of $57,000 to renegotiate the note owing the failure
of GFP to pay for certain packing material, worth more than $57,000, which
had been ordered by GFP and made to order in 1999. The Company accepted
this charge and obtained the waiver of any interest on the outstanding
balance of $155,743 during the next 12 months. Accordingly, the charge of
$57,000 was recorded as deemed interest and will be amortized in the next
12 months. The amortization in the third quarter ended September 30, 2000
was $14,250.
Note 5 - Licensing Agreement with Warner Brothers Consumer Products Co.
On July 26, 2000, Bravo! Entered into a licensing agreement with Warner
Brothers Consumer Products Co. and obtained rights to utilize Warner
Brothers' Looney Tunes character images and names in the U.S. This licensing
agreement gives the Company exclusive rights to such images and names in
the entire U.S. for use in connection with specified categories of products
sold by the Bravo! subsidiary. Bravo! generated revenue of approximately
$50,000 in the third quarter ended September 30,2000.
The Company recorded the gross amount of $500,000 as a licensing agreement
and an obligation to licensing agreement of $500,000 simultaneously. An
amount of $250,000 was payable upon the signing of this agreement with the
balance paid as follows: $100,000 on or before June 1, 2001; $100,000 on or
before December 1, 2001; and $50,000 on or before June 1, 2002.
The licensing agreement is effective from January 1, 2000 through December
21, 2002. However, the Company signed the agreement on July 26, 2000,
resulting in an effective period of 30 months. Accordingly, the Company
will amortize the licensing agreement over a period of 30 months. The
amortization in the third quarter ended September 30, 2000 was $50,000.
Note 6 - Transactions in Shareholders' Equity
On August 3, 2000, the Company issued 18,199 shares of its common stock at
$0.8242 per share to Stephen Langley, the Company's Chief Operating Officer
- China, for two quarterly bonus periods, pursuant to the terms of a
written employment contract, based upon a per share price determined by an
average of the monthly stock trading price calculated monthly, but paid on
a quarterly basis.
On August 15, 2000, the Company issued 6,439 shares of its common stock at
$0.9318 per share to The Omega Company for consulting services rendered on
dairy industry issues for a three month period, pursuant to the terms of a
written consulting contract. Mr. Arthur Blanding, owner of The Omega
Company, is a director of the Company. The Company did not received cash
for these shares.
Note 7 - Subsequent Events
On October 2, 2000, the Company issued the aggregate of 25,000 shares of
its Amended Series G Convertible Preferred Stock and warrants for 114,777
shares of its common stock. This preferred stock and warrants were issued
to two investors, pursuant to the Company's partial exercise of a first put
option for additional financing by holders of the Company's previously
issued Series G Convertible Preferred Stock. The Amended Series G
Convertible Preferred Stock and the warrants were priced at $10.00 per unit
and resulted in proceeds of $226,487.50, net of $23,512.50 of legal and
issuance expenses. The Amended Series F Convertible Preferred Stock issued
has a stated value of $10.00 per share and a conversion feature equal to
the stated value per share divided by the conversion price. The conversion
price shall be, at the election of the Holder, $.60, or 75% of the average
of the three (3) lowest closing bid prices for the twenty-two (22) days
immediately preceding the conversion of the respective shares of Amended
Series F Preferred Stock. Warrants for an aggregate of 114,777 shares of
common stock were issued to the investors with an exercise price of $0.9625
per share and an expiration date of October 2, 2003.
On October 13, 17 and 18, 2000, the Company issued the aggregate of 24,999
shares of its Amended Series F Convertible Preferred Stock and warrants for
114,777 shares of its common stock to three investors who are holders of the
Company's previously issued Series F Convertible Preferred Stock. The
Amended Series F Convertible Preferred Stock and the warrants were priced
at $10.00 per unit and resulted in proceeds of $224,965.50, net of
$25,024.50 of legal and issuance expenses. The Amended Series F Convertible
Preferred Stock has a stated value of $10.00 per share and a conversion
feature equal to the stated value per share divided by the conversion
price. The conversion price shall be, at the election of the Holder, $.60,
or 75% of the average of the three (3) lowest closing bid prices for the
twenty-two (22) days immediately preceding the conversion of the respective
shares of Series F Preferred Stock. Warrants for an aggregate of 114,777
shares of common stock were issued to the investors with an exercise price
of $0.9625 per share and expiration dates of October 13, 17 and 18, 2003,
respectively.
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations - Nine Months Ended September 30, 2000
---------------------------------------------------------------
RESULTS OF OPERATIONS
Financial Condition September 30, 2000
--------------------------------------
As of September 30, 2000, the Company had an accumulated deficit of
$15,291,486. As of September 30, 2000, the Company had cash on hand of
$172,012, of which 86,000 is restricted as collateral for a Chinese bank
loan to China Premium (Shanghai), and reported total shareholders' equity
of $1,405,900.
For this same period of time, the Company had revenue of $57,716 and
general and administrative expenses of $2,342,003. The continued increase
in these expenses from prior periods is a result of intensified activities
in establishing a refocused business base in China and the costs associated
with the launch of the business operations of Bravo! Foods, Inc., a wholly
owned subsidiary of the Company, in the United States. In addition to
general and administrative expenses in the United States, advances were
made to the Company's wholly owned Chinese subsidiary, China Premium Food
(Shanghai) Co., Ltd., to fund expenses associated with the distribution
logistics, promotion and production of Looney Tunes(TM) branded milk
products and snack crackers in the greater Shanghai, PRC. The Company
advanced $82,536.30 to Bravo! to fund expenses associated with general and
administrative expenses and the promotion of Looney Tunes(TM) branded milk
products sold in the United States under Bravo!'s Looney Tunes(TM)
licensing agreement with Warner Bros.
After net interest expenses of $13,122 and the loss on the Company's
investment in its Hangzhou Meilijian subsidiary of $202,305, the Company
had a net loss of $2,738,799.
Nine Months Ended September 30, 2000, Compared to
-------------------------------------------------
Nine Months Ended September 30, 1999
------------------------------------
The Company's net loss decreased approximately 0.0006% to $2,738,799
in 2000 from $2,740,415 in 1999. The decrease in the net loss was due to
the write off of the Company's investment in GFP and revenue of $50,250
from Bravo! and $7,466 from China Premium (Shanghai) in 2000.
Accrued dividends increased approximately 30% to $1,192,151 in 2000
from $912,832 in 1999. This increase was the result of the conversion
features the Series F and G convertible preferred stock issued in 2000.
As of September 30, 2000, there were 12,939,880 shares of common
stock outstanding compared with 8,905,229 shares of common stock
outstanding as of September 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 11,703,512. Due to the increase in common shares
outstanding in 2000, the Company's loss per share in 2000 decreased by
approximately 26% to $0.34 per share in 2000 from $0.43 per share in 1999.
General and administrative expenses increased by approximately 34% to
$2,342,003 in 2000 from $1,736,786 in 1999. This increase reflects the
costs associated with the establishment and funding of the day to day
operations of new businesses in China and the United States including
* China Premium (Shanghai), an import/export company and food
marketing and distrinution 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
* the development of the Bravo! business including the launch of
Looney Tunes(TM) branded milk products in the United States
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 September 30, 2000 Compared to
-------------------------------------------------
Three Months Ended September 30, 1999
-------------------------------------
The Company's net loss increased approximately 18% to $1,025,931 in
2000 from $866,313 in 1999. The increased net loss was due to the increased
expenses associated with the launch of the Looney Tunes(TM) branded milk
programs in China and the United States in 2000.
The Company reported a decreased loss per share of approximately 34%
from $0.12 in 1999 to $0.08 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 increase in the number of common shares outstanding
* the decrease in accrued dividends payable
Accrued dividends decreased approximately 70% to $57,433 in 2000 from
$192,625 in 1999.
General and administrative expenses increased by approximately 52% to
$845,693 in 2000 from $553,747 in 1999. This increase reflects the costs
associated with the establishment and funding of the day to day operations
of new businesses in China and the United States. 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.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1999, the Company reported that net cash used in
operating activities was $1,524,293, net cash used in investing activities
was $1,212,310, and net cash provided by financial activities was
$2,508,699.
As of September 30, 2000, net cash used in operating activities was
$2,705,361, net cash used in investing activities was $608,497, and net
cash provided by financing activities was $3,382,894.
Net cash used in operating activities increased approximately 77% to
$2,705,361 in 2000 from $1,524,293 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 of new
businesses in China and the United States and supporting the U.S.
management operations of the Company.
Net cash used in investing activities decreased approximately 55% to
$608,497 in 2000 from $1,121,310 in 1999. The decrease mainly was due to
the elimination of advances to Meilijian and GFP.
Net cash provided by financing activities increased 35% to $3,382,894
in 2000 from $2,508,699 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, second and third quarters of 2000, ending September
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.
These efforts in part center on a Master License which the Company holds
from Warner Bros. for the use of Looney Tunes(TM) characters on milk
products in the Shanghai and Hangzhou greater metropolitan areas in China
and a similar license issued to Bravo! Foods, Inc. for the United States.
In China, these efforts are through China Premium (Shanghai), the Company's
wholly owned Chinese registered import/export/distribution subsidiary. In
the United States, these efforts are through Bravo!, the Company's wholly
owned Delaware subsidiary.
China Premium (Shanghai) commenced the importation and distribution
Looney Tunes(TM) snack crackers in September/October 2000. China Premium
(Shanghai) presently produces Looney Tunes(TM) milk products under supply
agreements with two local dairies and distributes these milk and snack
products in the greater Shanghai area under two distribution agreements
with local distributors. As of early September 2000, the Company's Looney
Tunes(TM) milk products are being sold in thirty hyper or super stores and
food markets in the Shanghai area, representing approximately three tonnes
of milk per day.
In the United States, Bravo! Food, Inc., launched its Looney
Tunes(TM) flavored milk products under a promotion contract with Quality
Chekd Dairies, Inc., a national member dairy cooperative, and two
production agreements with local dairies in Tennessee and Colorado and
contiguous areas. Bravo! had revenues of $50,250 in September 2000 and
$38,250 in October 2000, representing Bravo!'s contractual fees under the
two production agreements for September/October 2000. On October 16, 2000,
Bravo! executed a production agreement with a third dairy for production
and sales of Looney Tunes(TM) flavored milk products in Pennsylvania and
contiguous areas. Bravo! expects this third dairy to be producing and
selling Looney Tunes(TM) flavored milk commencing in January 2001. Through
the end of this reporting period, the Company advanced $82,536.30 to Bravo!
to cover day to day opening expenses. In October and November 2000, the
Company advanced $50,000 and $200,000, respectively, to Bravo! for the up
front payment of guaranteed royalties to Warner Bros., pursuant to Bravo!'s
Looney Tunes(TM) license agreement for the United States.
During the quarter ending June 30, 2000, the Company commenced
negotiations to be bought out of the Meilijian joint venture by its Chinese
partner. These negotiations led to the execution of a letter of intent and,
in November of 2000, an agreed upon buy out figure in the area of $900,000.
The final buy out number is still under negotiation and adjustment. The
Company anticipates closing this transaction in the fourth quarter of this
year. This buy out, when consummated, will result in the write off of the
Company's investment in and advance toMeilijian and related goodwill, with
the reversal of accounting entries for accumulated translation adjustments.
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. During the course of
the due diligence for the Mandarin transaction, the Company became aware
that its acquisition of Mandarin would significantly limit the scope of its
business license under PRC regulations concerning Foreign Investment
Enterprises. The Company 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, the Company 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. The
Company 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. As part of this
transaction, Mr. Li has agreed to liquidate Mandarin Fine Foods. The
details of this transaction and the formation of a Yangling District
foreign investment joint venture company have been ongoing.
During this period of discussion and negotiations with the Yangling
District and Mr. Li, the Company became aware of the potential beneficial
impact of anticipated rule changes in China on the Company's China Premium
(Shanghai) operation. As a Chinese registered company in the Wai Gao Qiao
("Free Trade Zone") district of Shanghai, China Premium (Shanghai) may be
capable of operating under its present business license to the same extent
possible under the broad joint venture business license offered by the
Yangling District. Further discussions with representatives of the Yangling
District and Mr. Li revealed the possibility of working with the Yandling
District and Mr. Li under routine arm's length supply contracts, without he
necessity of a joint equity arrangement. As a result, the Company is
continuing to explore the possible utilization of the existing business
license of its wholly owned subsidiary, China Premium (Shanghai), to
establish a country wide sales and distribution system for consumer food
products and for food service products such as offered by Mandarin Fine
Foods Company. In addition to allowing the Company to own 100% of this
business, the utilization of its existing China Premium Food (Shanghai)
subsidiary would eliminate the necessity of the Company's capital
contribution for the Yangling Mandarin joint venture.
Going forward, the Company's primary requirements for cash consist of
* expenses related to the development of the distribution
business infrastructure for the country wide food
sales/distribution business
* expenses related to the development of the e- commerce business
infrastructure for the country wide food sales/distribution
business
* 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
* payments of guaranteed royalty payments to Warner Bros. under
existing licensing agreements for both China and the United
States
The Company estimates that approximately US $350,000 will be needed
to fund these activities through the end of 2000. In addition to these
anticipated expenses, the Company currently has monthly working capital
needs of $140,000.
In October 2000, the Company issued 24,999 shares of its Series F and
25,000 shares of its series G convertible preferred stock, and realized
gross proceeds of $499,990. In addition, the Company's anticipated revenue
contribution to overhead by the end of the third quarter of this year has
materialized with the launch of Looney Tunes(TM) flavored milk products in
the United States. The Company anticipates that Bravo! will continue to
produce revenue to help meet its operational needs. Finally, the Company
anticipates that additional funding may be generated through the sale of
additional equity under commitments built into the Series D and Series G
Convertible Preferred transactions.
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,
International Paper. 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 was due on July 15, 2000. The Company
has negotiated with International paper for the extension of this note. On
July 6, 2000, International Paper agreed to extend the note to July 1,
2001, and the principal amount was adjusted $155,743.17 due to different
interest calculation approach. International Paper imposed a charge of
$57,000 to renegotiate the note owing the failure of GFP to pay for certain
packing material, worth more than $57,000, which had been ordered by GFP
and made to order in 1999. The Company accepted this charge and obtained
the waiver of any interest on the outstanding balance of $155,743 during
the next 12 months.
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
Changes in Securities and Use of Proceeds
-----------------------------------------
On August 3, 2000, the Company issued 18,199 shares of its common
stock to Stephen Langley, the Company's Chief Operating Officer - China,
pursuant to the terms of a written employment contract. The Company did not
received cash for these shares.
On August 15, 2000, the Company issued 6,439 shares of its common
stock to The Omega Company for consulting services rendered on dairy
industry issues pursuant to the terms of a written consulting contract. Mr.
Arthur Blanding, owner of The Omega Company, is a director of the Company.
The Company did not received cash for these shares.
Subsequent Events
-----------------
On October 2, 2000, the Company issued the aggregate of 25,000 shares
of its Amended Series G Convertible Preferred Stock and warrants for
114,777 shares of its common stock. This preferred stock and warrants were
issued to two sophisticated and accredited investors, pursuant to the
Company's partial exercise of a first put option for additional financing
by holders of the Company's previously issued Series G Convertible
Preferred Stock. The Amended Series G Convertible Preferred Stock and the
warrants were priced at $10.00 per unit and resulted in proceeds of
$226,487.50, net of $23,51250 of legal and issuance expenses. The Amended
Series F Convertible Preferred Stock issued has a stated value of $10.00
per share and a conversion feature equal to the stated value per share
divided by the conversion price. The conversion price shall be, at the
election of the Holder, $.60, or 75% of the average of the three (3) lowest
closing bid prices for the twenty-two (22) days immediately preceding the
conversion of the respective shares of Amended Series F Preferred Stock.
Warrants for an aggregate of 114,777 shares of common stock were issued to
the investors with an exercise price of $0.9625 per share and an expiration
dates of October 2, 2003. The Amended 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 October 13, 17 and 18, 2000, the Company issued the aggregate of
24,999 shares of its Amended Series F Convertible Preferred Stock and
warrants for 114,777 shares of its common stock to three sophisticated and
accredited investors, who are holders of the Company's previously issued
Series F Convertible Preferred Stock. The Amended Series F Convertible
Preferred Stock and the warrants were priced at $10.00 per unit and
resulted in proceeds of $224,965.50, net of $25,024.50 of legal and
issuance expenses. The Amended Series F Convertible Preferred Stock has a
stated value of $10.00 per share and a conversion feature equal to the
stated value per share divided by the conversion price. The conversion
price shall be, at the election of the Holder, $.60, or 75% of the average
of the three (3) lowest closing bid prices for the twenty-two (22) days
immediately preceding the conversion of the respective shares of Series F
Preferred Stock. Warrants for an aggregate of 114,777 shares of common
stock were issued to the investors with an exercise price of $0.9625 per
share and expiration dates of October 13, 17 and 18, 2003, respectively.
The Amended 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.
Exhibits and Reports on Form 8-K
(a) Exhibits - Required by Item 601 of Regulation S-B.
(4) Amended Certificate of Designation Series F Convertible
Preferred Stock
(4) Amended 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
