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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Report For Period January 1, 1999 to December 31, 1999
CHINA PREMIUM FOOD CORPORATION
(formerly China Peregrine Food Corporation)
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(Name of Small Business Issuer in its Amended Charter)
Commission File Number 0-20549
Delaware 62-1681831
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11300 US Highway 1, Suite 202, North Palm Beach, Florida 33408 USA
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(Address of principal executive offices) (Zip Code)
Telephone number: (561) 625-1411
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Securities registered under Section 12(b) of the Exchange Act:
None
Securities registered under Section 12(g) of the Exchange Act
Common Stock, $.001 par value
(Title of class)
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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 [ ]
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [ ]
The issuer's revenues for its most recent fiscal year were $-0-.
The aggregate market value of the voting stock held by non-affiliates of the
issuer on March 1, 2000, based upon the $0.8438 per share average bid and
asked prices of such stock on that date, was $5,255,670. The number of
issuer's shares of common stock outstanding as of March 1, 2000 was
10,353,391.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [ X ]
DOCUMENTS INCORPORATED BY REFERENCE: NONE
PART I
ITEM 1 - DESCRIPTION OF BUSINESS
BUSINESS DEVELOPMENT
Overview
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China Peregrine Food Corporation is a Delaware corporation, which
presently owns the majority interest in two Sino-American joint ventures
in China known as Green Food Peregrine Children's Food Co. Ltd. and Hangzhou
Meilijian Dairy Products Co., Ltd.
The Company, which was formed on April 26, 1996, was formerly known as
Shakespeare Holding, Inc. In February, 1997, Shakespeare merged with Manor
Products Corp., a Delaware company established on January 26, 1996, and
changed its name to China Peregrine Food Corporation. Manor was a shell
company with 331 shareholders and no operating history. Similarly, China
Peregrine Food Corporation was a company without substantial assets or
operating activity until it purchased the assets of China Peregrine
Enterprises Limited in March, 1997.
The March 5, 1997 purchase of the assets of China Peregrine
Enterprises Limited by the Company resulted in the Company becoming an
operating entity. These assets consisted of the equity position and
contractual rights which China Peregrine Enterprises had in the Green Food
Peregrine Chinese joint venture. In consideration for this purchase, the
Company issued 45% of its outstanding common stock to the limited
partnership. Owing to the Company's non-operating status prior to the above-
described acquisition, this transaction has been accounted for as a
"reverse" acquisition for financial reporting purposes. Although China
Peregrine Enterprises is deemed to be the acquiring company for financial
accounting and reporting purposes, the legal status of the Company as the
surviving and operating entity remains intact.
On February 1, 2000, the Company changed its name from China Peregrine
Food Corporation to China Premium Food Corporation.
Green Food Peregrine Children's Food Co. Ltd.
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From April of 1993, through March 5, 1997, the majority equity
interest in Green Food Peregrine was owned by China Peregrine Enterprises, a
Texas limited partnership created for the sole purpose of controlling the
operation of the Green Food Peregrine joint venture business. The Green Food
Peregrine joint venture company was formed pursuant to a joint venture
contract and Articles of Association, dated April 13, 1993, by and among
China National Green Food, China Peregrine Enterprises, and Amer-China
Partners Ltd. Pursuant to the joint venture contract and the Articles of
Association for Green Food Peregrine, China Peregrine Enterprises was
required to invest US $3,000,000 as its share of the joint venture's
registered capital, with an initial investment of US $720,000.
On October 1, 1997, the Company and Amer-China executed an agreement
for the transfer of Amer-China's contract rights and equity interest in
Green Food Peregrine to the Company. The consideration for this transfer was
120,000 shares of the Company's common stock. With the approval of this
transfer by the Ministry of Foreign Trade and Economic Cooperation, the
Company's equity interest in Green Food Peregrine increased from 67.6% to
70%.
On May 2, 1998, the Company approved and ratified an agreement between
the Company and China National Green Food for the increase of the Company's
equity interest in Green Food Peregrine from 70% to 76.92%. This change in
the ownership ratio will take place upon the payment of an additional US
$1,500,000 in registered capital by the Company over the next eighteen
months. Since Chinese government regulations require approval of this change
of the investment ratio by the Ministry of Foreign Trade and Economic
Cooperation, the Company agreed to interim loans to Green Food Peregrine,
presently aggregating approximately, US $1,200,000, with the conversion of
that loan to registered capital upon obtaining the required governmental
approval. To date, governmental approval of this increase in registered
capital has not occurred.
The stated purpose of the joint venture contract is to strengthen
economic cooperation and exchange of technology to develop and improve the
quality of products which are competitive in the domestic and international
markets and to improve economic efficiency and ensure satisfactory economic
profits. The scope of the business of Green Food Peregrine is stated as the
manufacture, distribution and marketing of children's fresh milk and other
children's food products, including baby foods and supplements. The
geographic scope of the joint venture was initially set in Shanghai and
Beijing, with expansion to other cities having a population exceeding 2
million upon approval by the Board of Directors.
No party to the joint venture contract may assign or sell any or part
of its ownership interests without a written consent from all other parties
to the joint venture contract. Similarly, any changes in the registered
capital of Green Food Peregrine must receive the unanimous approval of the
Board of Directors and be approved by the examination and approval
authority. The respective responsibilities of the parties under the joint
venture contract include China National Green Food Corporation's assistance
and compliance with all local legal, governmental and other requirements for
the operation of the business. The other parties, including the Company,
have the responsibility for providing equipment and materials to operate the
business and to initiate and maintain qualified management, who have the
responsibility of operating the business of the joint venture.
The Board of directors of Green Food Peregrine consists of five
members, with China National Green Food Corporation having the right to
appoint two members, the Company having the right to appoint three members,
plus the appointment of one advisory director, who has no right to vote. The
term of board members is four years unless extended by the appointing party.
The Chairman of the Board is elected from the members appointed by China
National Green Food Corporation. While the Chairman is designated as the
legal representative of the joint venture, the Chairman acts at all times
subject to the direction of the Board of Directors. The joint venture
contract provides that the Board of Directors is the "highest organ of power
of the joint venture" and the Board has the sole power to revise the
Articles of Association for the joint venture company, increase or assign
the registered capital and make determinations concerning the termination,
dissolution or liquidation of the joint venture.
The management of the business of Green Food Peregrine is the
responsibility of the General Manager, who is nominated by the Company and
approved by the Board of Directors. The General Manager is responsible for
implementing all resolutions of the Board of Directors and for organizing
and exercising management of the daily administrative and production
functions of the joint venture.
The term of the joint venture contract is fifty years, and can be
extended by the Board of Directors upon the approval and examination of the
approval authority. The joint venture contract, however, may be terminated
by written notice prior to the expiration of the stated term upon certain
events including a violation of the joint venture contract by any party,
without resolution; accumulated losses in excess of the total registered
capital, without resolution; assignment of equity ownership by one party
without approval; and the violation of Chinese laws in the operation of the
joint venture. Upon a written notice of termination, the parties to the
joint venture contract are charged with making attempts to negotiate a
resolution of the circumstances which led to the notice of termination
within sixty days after the issuance of the termination notice. If the
parties cannot reach an agreement to settle the matter, the Board of
Directors is directed to submit an application to the examination and
approval authority for dissolution.
In January, 2000, the Company commenced the termination process under
the joint venture contract. The termination is based upon the violation of
the joint venture contract by China National Green Food (refusal to
cooperate in the Company's attempts to exercise its contractual right to
change management of the joint venture) and the existence of accumulated
losses in excess of the total registered capital of the joint venture
company.
Hangzhou Meilijian Dairy Products Co., Ltd.
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On September 3, 1997 and June 28, 1998, respectively, the Company
executed agreements to acquire a 52% interest in Hangzhou Meilijian Dairy
Products Co., Ltd. from American Flavors China, Inc., a Delaware
corporation. American Flavors China is controlled by Noam and Florence
Sender. Prior to this transaction, the Senders had no affiliation with the
Company. The remaining 48% of Hangzhou Meilijian is owned by Hangzhou Dairy
Co., a controlled entity of the regional Chinese government. On July 31,
1998, the Board of Directors of Hangzhou Meilijian approved the acquisition
and, subsequently, the acquisition transaction was approved by the regional
government agency. The Company, with the cooperation of its Chinese partner
and American Flavors China, has installed a new management team to run the
day to day operation of that dairy facility.
The joint venture contract between Hangzhou Dairy Complex and American
Flavors China, Inc. was executed on July 25, 1993. Pursuant to its terms,
the execution of the contract and of all material changes to the joint
venture contract must be approved by the examination and approval authority.
As a limited liability company, the liability of each equity owner is
limited to its respective contributions of registered capital. As such, no
party is liable to the other for the liabilities of the joint venture
entity.
The total registered capital for the Joint venture Company is US
$5,000,000, with American Flavors China initially contributing 52% of that
amount. The contribution of capital, which is now completed under the
express terms of the joint venture contract, was paid into the joint venture
entity in cash and equipment.
The stated purpose of the joint venture contract is to strengthen
economic cooperation and exchange of technology to develop and improve the
quality of products which are competitive in the domestic and international
markets and to improve economic efficiency and ensure satisfactory economic
profits. The scope of the business is the production of dairy products,
drinks with milk content, fruit juice and the development of new products.
No party to the joint venture contract may assign or sell any or part
of its ownership interests without a written consent from all other parties
to the joint venture contract. Similarly, any changes in the registered
capital of the Hangzhou Meilijian must receive the unanimous approval of the
Board of Directors and be approved by the examination and approval
authority.
The Board of directors of Hangzhou Meilijian consists of six members,
with three members being appointed by each party. The term of board members
is four years unless extended by the appointing party. The Chairman of the
Board is elected from the members appointed by American Flavors China and is
designated as the legal representative of the joint venture. The Board has
the sole power to revise the Articles of Association for the joint venture
company, increase or assign the registered capital and make determinations
concerning the merger, termination, dissolution or liquidation of the joint
venture. The management of the business of Hangzhou Meilijian is the
responsibility of the Board of Directors, with limited powers delegated to
the General Manager
The term of the joint venture contract is twenty years, and can be
extended by the Board of Directors upon the approval and examination of the
approval authority. The joint venture contract, however, may be terminated
prior to the expiration of the stated term upon certain events including a
violation of the joint venture contract by any party, without resolution;
accumulated losses resulting in the inability of the joint venture to
continue; and conditions of impossibility of performance.
The joint venture contract provides for the continuation of the
operation of Hangzhou Meilijian subsequent to the expiration of the twenty
year term, by unanimous agreement of the parties. If the joint venture is
not continued beyond the term of the joint venture contract, provisions are
made for the orderly liquidation of the assets of the company and any
remaining capital after payment of debts shall be divided according to the
parties' respective registered capital contributions. If any dispute is
not resolved in accordance with the terms of the contract, the dispute shall
be submitted to the American Institute of the Stockholm chamber of commerce
in Stockholm, Sweden, for the final decision in accordance with the
arbitration rules of the Institute.
Currently, the Company has proposed the restructuring of the voting
power within the Hangzhou Board of Directors to give the Company greater
control of the business activities of the joint venture, with the Company's
contribution of an increase in the percentage of registered capital
attributed to the Company. The Company accounts for its investment in
Meilijian using the equity method of accounting.
New Subsidiaries
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In December 1999, the Company obtained Chinese government approval for
the registration of a new wholly owned subsidiary in the Wai Gao Qiao "Free
Trade Zone" in Shanghai, China, known as China Premium Food Corporation
(Shanghai) Company, Ltd. The Company intends to develop an import, export
and distribution business in China through this subsidiary.
Also in December of 1999, the Company formed Bravo! Foods, Inc., a
wholly owned Delaware subsidiary, which will be utilized to advance the
Company's business strategy of promoting and distributing branded products
in the United States, through strategic arrangements with local producers
and manufacturers.
As of March 30, 2000, neither of these two new subsidiaries has been
capitalized.
FORWARD-LOOKING STATEMENTS
To keep investors informed of the Company's future plans and
objectives, this Annual Report on Form 10-KSB (and other reports and
statements issued by the Company and its officers from time to time) contain
certain statements concerning the Company's future results, future
performance, intentions, objectives, plans and expectations that are or may
be deemed to be "forward-looking statements." The Company's ability to do
this has been fostered by the Private Securities Litigation Reform Act of
1995 which provides a "safe harbor" for forward-looking statements to
encourage companies to provide prospective information so long as those
statements are accompanied by meaningful cautionary statements identifying
important factors that could cause actual results to differ materially from
those discussed in the statement. Such forward-looking statements are
subject to a number of known and unknown risks and uncertainties that, in
addition to general economic and business conditions, could cause the
Company's actual results, performance, and achievements to differ materially
from those described or implied in the forward-looking statements. Factors
that could cause or contribute to such differences include, but are not
limited to, the Company's ability to achieve profit from its business
strategies, the ability of the Company to enter into strategic arrangements
for the production and distribution of branded products, the Company's
ability to meet competition, the Company's ability to exploit its licensing
agreements, the Company's ability to penetrate different markets and the
Company's ability to generate cash flows and obtain financing to support its
operations and growth (see "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in Item 7 of this Annual
Report on Form 10-KSB).
BUSINESS OF THE COMPANY
Overview
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The Company is headquartered in North Palm Beach, Florida. The Company
directs the operations of its subsidiaries, Green Food Peregrine, and the
Hangzhou Meilijian joint venture, from that location and through frequent
trips to China by the Company's President and Chief Executive Officer. In
addition, the Company's interests in the day to day operations of the
Chinese joint venture subsidiaries and, going forward, the Company's Wai Gao
Qiao wholly owned subsidiary, are the responsibility of the Company's Chief
Operating Officer (China) and Chief Financial Officer (China), who are
resident in Shanghai, China.
Initially, the mission of the Company was to implement a comprehensive
manufacturing, distribution and marketing strategy that would allow the
Company to operate its Chinese operations toward profitability and to expand
the joint venture business into new markets with dairy and non-dairy food
products. This strategy envisioned the creation of a nationwide network of
state-of-the-art manufacturing facilities that can process products and
deliver the highest quality of fresh refrigerated pasteurized milk to the
local consumer. Such facilities would have allowed the Company to develop
its position as an effective competitor in the dairy business in major
cities in China and allow for the expansion of the Company's business into
other dairy and non-dairy food products.
The majority equity interest in Green Food Peregrine was purchased in
early 1997 by the Company to implement this mission. To date, over $6
million dollars have been invested in the Green Food Peregrine effort but,
despite various business strategies, product shifts and attempted management
changes, Green Food Peregrine's pasteurized milk business failed to reach
economic viability, never having penetrated more than 3% of the relevant
market. The business activities of Green Food Peregrine ceased in early
December 1999. Accordingly, the Company doubts that it will recover its
investment in that joint venture.
On the other hand, the Hangzhou Meilijian joint venture, although
technologically limited by western standards, is the dominant dairy and
juice producer in Hangzhou, a city of 6 million people, with an 80% market
share. With new capital invested in advanced processing equipment, delivery
systems, and marketing efforts, this joint venture has been close to
breakeven in 1999 and is planning new product launches in 2000, including
Looney Tunes(TM) branded items, that management believes will result in
profitability. Hangzhou Meilijian's sales accounted for 90% of China
Premium's subsidiaries' approximately $6.5 million gross revenues for the
fiscal year ending December 31, 1999. The Hangzhou Meilijian joint venture
has been in business for over 40 years and has over 420 employees. Hangzhou
Meilijian produces and distributes dairy and juice products, including
baggie milk, milk powder, aseptic packaged milk and juice products, as well
as bottled drinkable yogurt. Hangzhou is located approximately 180 miles
from Shanghai.
During 1999, two initiatives were undertaken to differentiate the
Company's products, marketing and, ultimately, business strategy. First, in
March, a licensing agreement with Warner Bros. Consumer Products was signed,
permitting the Company to produce and distribute, through its subsidiaries,
a line of high quality, flavored milks branded with the Warner Bros. Looney
Tunes(TM) logos, characters and names. Through taste testing and product
development in the summer and fall of 1999, a line of white and flavored
milk and yogurt drinks for the Chinese urban market was created. These
products each feature a different Looney Tunes(TM) character and have
particular packaging and flavor profiles for each different cartoon
character. Carrefour hypermarkets, Shanghai's largest food retailer,
introduced the first four flavored milks during their October, 1999 20th
anniversary promotion in Shanghai, including Tweety orange milk, Daffy
banana milk, Taz chocolate milk and Silvester vanilla milk. Despite a retail
price premium of 40% over the major competitor's flavored milks, these new
products outsold the competitive brands by 4 to 1, with no external
advertising and minimal in-store promotion.
Second, beginning in the third quarter of 1999, the Company's
management recognized that Green Food Peregrine would require considerable
additional resources to make any appreciable progress toward profitability.
In addition, in order to take advantage of the new Looney Tunes(TM)
products, planned advertising and promotional support in Shanghai,
management realized that much greater distribution and reach than possible
with Green Food Peregrine was essential for a successful product launch.
This analysis led to a strategic decision to exit the production business in
Shanghai and to establish strategic arrangements throughout China with large
producers of dairy and healthy beverages for Looney Tunes(TM) product
production and distribution. These arrangements contemplate the Company's
contribution of its Looney Tunes(TM) production rights, including
advertising and marketing support, with production and distribution of
products handled by existing, well established dairies in China.
Remuneration to China Premium will be based upon a negotiated percentage of
gross revenues realized in the sales of the Looney Tunes(TM) product line.
Currently, the Company is actively soliciting large dairies in China's top
ten cities to implement this new business strategy on a much larger scale.
This initiative has moved the Company from a capital intensive production
business toward a business which supplies value added branded rights and
sales support to existing production and distribution facilities operated by
others.
Beyond these two initiatives, the Company moved further away from
production in an attempt to position itself in the business of food
distribution in China. In December 1999, the Company obtained government
approval for the registration of a wholly owned subsidiary in the Wai Gao
Qiao Free Trade Zone in Shanghai, China. This subsidiary, known as China
Premium Food Corporation (Shanghai) Company, Ltd., offers foreign companies
all the infrastructure necessary to facilitate import/export transactions in
or with China, including tax and legal compliance, customs and foreign
currency exchange. Pursuant to Wai Gao Qiao rules, this subsidiary can
distribute products that it imports into China, while maintaining reasonable
price/profit margins owing to its status as a direct importer.
In addition, in February of 2000, the Company announced an agreement
in principle to acquire the business 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, China's two largest and most advanced cities. The
agreement calls for the Company to obtain operating control of the business
of Mandarin with the payment of $2.2 million and stock of the Company valued
at $1.75 per share for an additional $2.2 million in value.
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. Mandarin processes its caviar in China,
utilizing local Sturgeon, and produces its own "fresh" pasta in China.
Currently, the Company is working through the terms and conditions of a
definitive agreement with Mandarin.
Finally, in December of 1999, the Company formed Bravo! Foods, Inc., a
wholly owned Delaware subsidiary which will be utilized to advance the
Company's business strategy of promoting and distributing branded products
in the United States.
Principal Products And Markets
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Historically and at present, the predominant milk product available to
consumers in major cities in the People's Republic of China has been non-
refrigerated "baggie milk," prepared for retail consumption on a daily
basis. The processing of baggie milk customarily has involved either a type
of pasteurization that has not met western bacteria count standards, or the
utilization of an ultra high temperature (UHT) process. The Hangzhou
Meilijian joint venture utilizes the UHT process for the production of its
milk products. The distribution of milk in China has been through a
methodology known as the "reserve system" which was put in place more than a
decade ago as a way to deliver state-produced milk directly to milk stations
and public housing units. Since refrigeration is not part of this
distribution system, the trend in recent years has been to utilize UHT
processed milk products in an attempt to meet bacteria count standards.
The Company's Hangzhou Meilijian subsidiary processes, packages and
distributes both UHT baggie milk and drinkable yogurt, which is sold in
individual bottles. In addition, the Company anticipates that, in 2000,
Hangzhou Meilijian will produce and sell western quality fresh, pasteurized,
refrigerated flavored and white milk, branded with the Looney TunesJ name
and characters in gable topped cartons. "Gable topped" cartons are
traditional Western style treated paper box like containers with triangular
"gable" tops.
The Company intends to establish strategic arrangements throughout
China with large producers of dairy and healthy beverages for the production
and distribution of Looney Tunes(TM) flavored milk products. Under such
arrangements, the Company will contribute its Looney Tunes(TM) production
rights, including advertising and marketing support, with production and
distribution of products handled by existing, well established dairies in
China.
Price Strategy
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Demographic statistics confirm that urban consumers have the financial
capability to pay a premium price for premium value at the consumer products
level. Depending on the competitive individual products, and the quality of
those competitive individual products, Hangzhou Meilijian expects to price
its milk products sold in Hangzhou and other markets, as follows:
<TABLE>
<S> <C> <C> <C>
Looney Tunes(TM) white milk (all markets) RMB6.38 US$0.77
Looney Tunes(TM) flavored milk (all markets) RMB8.00 US$0.96
Looney Tunes(TM) aseptic bricks (all markets) RMB8.00 US$0.96
Tetra- Pack white milk (Zhejiang market) RMB4.65 US$0.56
Tetra- Pack white milk (other markets) RMB6.38 US$0.77
</TABLE>
These prices represent a premium of approximately 30% to 40% over the prices
charged by competitors in the relevant markets. With respect to UHT baggie
milk and drinkable yogurt, Hangzhou Meilijian's prices are in line with
competitors' prices.
The referenced demographic statistics in this discussion are based
upon extrapolations from the Chinese State Statistical Bureau Reports for
1997 and China The Consumer Revolution, Conhua Li, Deloitte & Touche
Consulting Group, John Wiley & Sons, Publishers, 1998.
Distribution
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In Hangzhou Meilijian, 90% of product distribution is accomplished
utilizing the traditional Chinese "reserve system". Each delivery truck is
insulated and makes deliveries directly from the processing plant.
Typically, each delivery truck makes one plant pick up and follows the same
delivery route each day. The "reserve system" usually involves delivery of
product to a non-refrigerated point of purchase. Typically, this point of
purchase was in the housing units (similar to large apartment buildings) of
consumers. As a result, product was delivered within hours of production (in
the very early morning hours), purchased by the consumer immediately upon
delivery to their housing unit, and consumed within hours of purchase. Under
this "reserve system," milk is packaged in 240 ml soft baggie packets that
are purchased daily in the lobby of the respective housing units. The
Company expects that incremental product acceptance of premium Looney
Tunes(TM) fresh, refrigerated milk, as well as its Tetra-Pack and aseptic
brick products, in Hangzhou and other markets will be such that the joint
venture's distribution system must expand from its present 20 trucks, with
associated distribution personnel.
Marketing and Advertising
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In China, the viewing rate for television is over 80% for those who
have watched television as recently as the previous day. This figure rises
to 86% for urban population. Nationwide, 54% of households own black and
white televisions and another 40% have color televisions. In Beijing and
Shanghai, 94% of households own color televisions.
At this time, there virtually is no advertising for milk or ready-to-
feed infant formula in Shanghai. There is TV and print advertising for other
carbonated and non-carbonated beverages, and multi-national company branded,
aseptic and powdered products. Management believes that all beverage
advertising for branded quality products will increase overall awareness and
consumption for these categories. After Hangzhou Meilijian has launched its
Looney TunesJ branded product and expanded its distribution, the Company
intends to begin print and television advertising. In addition, the Company
will provide marketing and advertising support for the production and
distribution if its Looney Tunes products through strategic arrangements
with dairy producers in major Chinese cities other than Hangzhou.
The Company hopes to coordinate its advertising efforts with national
awareness campaigns by Warner Bros. in China for Looney Tunes(TM)
characters.
Competition
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For quite some time, there have been powdered and aseptic packaged
products available in China that could be considered as indirect competition
to the Company's product line. The Company, however, does not believe that
this product line would effectively compete with its Looney Tunes(TM)
flavored dairy products.
In Hangzhou, the Company's joint venture enjoys an 80% share of the
relevant market, without significant competition as an historic matter. In
the past year, however, Shanghai Dairy Corporation has commenced sales
efforts in Hangzhou. While this competitor appears to be well organized and
well funded, the Company believes that a combination of product loyalty and
Looney Tunes(TM) branded products will enable Hangzhou Meilijian to maintain
a significant share of the local market.
Suppliers
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Green Food Peregrine used and Hangzhou Meilijian continues to utilize
cartons and boxes supplied by International Paper Company. In Hangzhou, the
Hangzhou Meilijian joint venture buys 80% of its raw milk from the Company's
partner in that joint venture, Hangzhou Dairy Complex. The remaining 20% of
purchases are from a variety of other dairies. The Company anticipates that
the required raw goods supply will be stable and adequate in the future.
Licensing and Status of New Products
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In January 1999, the Company signed a Master Licensing Agreement with
Warner Brothers Consumer Products Co. and obtained the right to utilize
Warner Brothers' Looney Tunes(TM) character images and names in the Shanghai
and Hangzhou greater metropolitan areas. This licensing agreement gives the
Company exclusive rights to such images and names in the defined geographic
regions for use in connection with specified categories of products sold in
those areas. The company started to introduce these Looney Tunes(TM)
products in Shanghai in October, 1999, but that introduction stopped with
the cessation of operations of Green Food Peregrine. The Company has not
started to introduce these Looney Tunes(TM) products in the Hangzhou markets
but expects to do so before the close of the second quarter of this year.
The Company recorded a $300,000 licensing agreement asset and an
obligation with respect to the Warner Brothers master licensing agreement.
An amount of $45,000 was payable upon the signing of this agreement and the
balance is to be paid in ten installments of $21,250, on or before the
following dates: September 30, 1999, December 31, 1999; March 31, 2000; June
30, 2000; September 30, 2000; December 31, 2000; March 31, 2001; June 30,
2001; September 30, 2001; December 31, 2001 and one final payment of $42,500
on or before March 31, 2002.
In April of 1999, the Company announced a definitive, exclusive,
private label agreement with Lance, Inc to export snack foods to China.
Lance will serve as the Company's exclusive supplier of cookies, cakes,
crackers, meat snacks, nuts and chips for the Chinese market. The Company
intends to import these snack items to China and will distribute them
through the Company's recently established and government approved China
Premium Food Corporation (Shanghai) Co., Ltd. The Company intends to combine
the exclusive supply contract with its anticipated contractual rights to
distribute and sell Looney Tunes(TM) snack products in China.
The Role of Government; Doing Business in China
- -----------------------------------------------
Doing business in China involves several risks including internal and
international political risks, evolving national economic policies as well
as financial and accounting standards, expropriation and the potential for a
reversal in economic conditions.
The revenues of the Company and its subsidiaries in China will be in
Chinese renminbi (RMB). In order to pay the Company fees and dividends,
conversion of RMB into US dollars is necessary. Under current Chinese law,
the conversion of RMB into foreign currency requires government consent.
Government authorities may impose restrictions which could have a negative
impact on the conversion process.
With respect to the conditions and activities of Chinese companies
with which the Company is involved pursuant to its joint venture contracts,
the operations of these joint venture companies must be viewed in the
context of the Chinese business environment existing in the People's
Republic of China. There can be no assurance that the sources from which
information is provided concerning the day to day activities of such joint
ventures, including their respective relationships to local governmental and
regulatory authorities, are wholly reliable. Official statistics also may be
produced on a basis different to that used in western countries. Any of the
statements as to operations contained in this document must be subject to
some degree of uncertainty due to doubts about the reliability of available
information from and with regard to the respective joint ventures.
Moreover, while the government of the People's Republic of China has
pursued a policy which has prioritized the development of children's food,
in particular milk products, to better serve its people resulting in a focus
on the role of agriculture, in general, in China, there can be no assurance
that this policy will continue in the long term. Similarly, the recent
changes in the laws of China pertaining to the future ownership of
commercial facilities presently owned by the state, which has resulted in a
perceived policy shift from a controlled economy to a free market system in
the dairy industry, may not be accurate in concept or in execution. As such,
the risk is present that the business strategy set forth in this document
may not be successful owing to a change in government approach, or that the
very existence of the joint venture businesses in which the Company has
controlling interests may be affected adversely.
Employees
- ---------
As of March 1, 2000, the Company had four management employees located
at its North Palm Beach corporate offices. Through the third quarter of
1999, Green Food Peregrine had 75 employees servicing its Shanghai facility,
functionally categorized as follows: management, 4; administrative, 10;
manufacturing 41; and distribution, 20. In 1999 and through March 1, 2000,
Hangzhou Meilijian had 420 employees, functionally categorized as follows:
management, 7; administrative, 150; manufacturing 213; and distribution, 50.
ITEM 2 - DESCRIPTION OF PROPERTY
Neither China Peregrine Food Corporation nor its subsidiaries
currently owns any real property. As of February 1, 1999, the Company's
corporate offices are located at 11300 US Highway 1, Suite 202, North, Palm
Beach, Florida, pursuant to a lease with HCF Realty, Inc., having a term of
five years. The Company's current aggregate monthly rent amounts to
approximately $4,200, which will increase (assuming an estimated annual
increase of 2%) to approximately $6,100 per month by the fifth year.
Green Food Peregrine, which is in the process of termination, leases
office facilities located in Shanghai, has a ground lease for the land on
which the dairy processing facility is located for a term ending June 30,
2043, at the rate of RMB25,000.00 per month (approximately US $3,012), and
leases a distribution center located in Shanghai, for a monthly tenancy, at
the rate of RMB 8,500 per month (approximately US $1,025). While Green Food
Peregrine does not own any real estate, it does own the buildings located on
the land, which is subject to the above described ground lease. The Company
does not have any liability with respect to these leases.
Hangzhou Meilijian leases office and production facilities in Hangzhou
from the Company's joint venture partner Hangzhou Dairy Complex at a rate of
approximately US $3,500 per month.
Currently, the Company does not have a policy to acquire property for
possible capital gains or income generation. In addition, the Company does
not invest in securities of real estate entities or developed or
underdeveloped properties.
ITEM 3 - LEGAL PROCEEDINGS
There currently are no claims or lawsuits against the Company or its
subsidiaries, except Green Food Peregrine. In June of 1998, Green Food
Peregrine entered into an agreement with State Development Bank of China and
the Construction Bank of China with respect to two loans aggregating
approximately US $1,200,000. These agreements called for the quarterly
payment of approximately US $50,000 to each bank. In late December 1999, the
State Development Bank of China and the Construction Bank of China commenced
lawsuits against Green Food Peregrine aggregating approximately US
$1,200,000.
In early December 1999, Eastsea Cow Farm, a raw milk supplier,
commenced an action to recover approximately US $43,000. In January 2000,
another milk supplier, the Zhejiang Xing Ye Group Co., Ltd., commenced an
action for approximately US $6,600 and has obtained a court order seizing
the property (including production and office facilities) of Green Food
Peregrine.
In October 1999, a Green Food Peregrine truck driver was adjudicated
responsible for an accident which injured another person. The compensation
due is approximately US $7,800 and may be paid from available insurance
proceeds.
The Company does not have any liability with respect to these claims
against Green Food Peregrine.
ITEM 4 - SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
The 1998 annual meeting of the shareholders of the Company was held on
March 16, 2000. The following matters were submitted to the shareholders at
the Annual Meeting. The first Proposal to be submitted at the Annual Meeting
was the election of four (4) directors of the Company for respective terms
to expire at the second subsequent annual meeting of shareholders of the
Company, to be held in the year 2001. The Board of Directors accepted
nominations for the following persons as directors of the Company, all of
whom presently serve as directors of the Company:
<TABLE>
<S> <C>
Mr. Robert J. Cummings (Director and member of the Executive Committee)
Mr. George Holdsworth (Director)
Mr. Michael G. Lucci (Director and member of the Executive Committee)
Mr. Phillip Pearce (Director and member of the Compensation Committee)
</TABLE>
<TABLE>
<S> <C>
Total Share Votes Recorded for Directors 10,617,162
Total Share Votes 12,113,391
Quorum Percentage 87.56%
</TABLE>
<TABLE>
<CAPTION>
For Withhold
--- --------
<S> <C> <C>
Votes for Mr. Cummings 6,874,475 2,982,487
Votes for Mr. Holdsworth 6,874,475 2,982,487
Votes for Mr. Lucci 6,873,975 2,982,989
Votes for Mr. Pearce 6,849,475 3,082,687
</TABLE>
The second Proposal submitted at the Annual Meeting was the
ratification or rejection of the selection by the Board of Directors of BDO
Seidman, LLP as independent public accountants for the Company for the
current fiscal year and for the past fiscal year. BDO Seidman, LLP has
examined the financial matters of the Company and of its Chinese subsidiary
as well as its predecessor operating entity and has issued a report on its
audit of said matters for the years ending December 31, 1996 through 1999.
<TABLE>
<S> <C>
Total Share Votes Recorded for Accountant 10,617,162
Total Share Votes 12,113,391
Quorum Percentage 87.56%
</TABLE>
<TABLE>
<CAPTION>
For Against
--- -------
<S> <C> <C>
Votes for Ratification 7,452,973 2,981,486
</TABLE>
PART II
ITEM 5 - MARKET FOR COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Market Information
- ------------------
Of the 10,353,3291 shares of the Company's common stock issued and
outstanding as of March 1, 1999, 2,503,168 shares held by non-affiliates are
subject to over-the-counter trading on the NASD OTC Electronic Bulletin
Board. The following quarterly quotations for Common Stock transactions on
the OTC Bulletin Board reflect inter-dealer prices, without retail mark-up,
mark-down or commissions and may not represent actual transactions.
<TABLE>
<CAPTION>
QUARTER HIGH BID PRICE LOW BID PRICE
------- -------------- -------------
<S> <C> <C> <C>
1997 Q4 (10/1 - 12/31) $6.87 $3.00
1998 Q1 (1/3 - 3/31) $4.10 $2.10
Q2 (4/1 - 6/30) $2.60 $0.60
Q3 (7/1 - 9/30) $2.50 $0.33
Q4 (10/1 B 12/31) $2.25 $1.00
1999 Q1 (1/3 - 3/31) $2.87 $0.87
Q2 (4/1 - 6/30) $2.87 $1.31
Q3 (7/1 - 9/30) $1.92 $1.12
Q4 (10/1 B 12/31) $1.25 $0.81
</TABLE>
Holders at March 1, 2000
- ------------------------
<TABLE>
<S> <C> <C>
Common Stock 10,453,129 shares 1,212 holders
Preferred Stock (Series A) 500,000 shares 1 holder
Preferred Stock (Series B) 1,260,000 shares 3 holders
Preferred Stock (Series C) 14,904 shares 1 holder
Preferred Stock (Series D) 130,250 shares 4 holders
</TABLE>
Dividends
- ---------
The Company has not paid dividends on its Common Stock and does not
anticipate paying dividends. The Company intends to retain future earnings,
if any, to finance working capital, to expand its operations, and to pursue
its acquisition strategy.
The holders of Common Stock are entitled to receive, pro rata, such
dividends and other distributions as and when declared by the Company's
Board of Directors out of the assets and funds legally available therefor.
The availability of funds to the Company is dependent upon dividends or
distribution of profits from its subsidiaries, and may be subject to
regulatory control and approval by the appropriate government authorities on
either a regional or national level in the People's Republic of China.
The Company has accrued dividends for its Convertible Preferred Stock
in the amount of $370,039 as of December 31, 1999.
Recent Sales of Unregistered Securities
- ---------------------------------------
FISCAL YEAR 1997
Prior to February 1997, the Company (then known as Shakespeare
Holding, Inc.) was owned by Tamarind Management, Ltd., which held 472,000
shares of Shakespeare's common stock as the original "founder." Shakespeare
did no business and was not an operating entity. In February 1997, however,
the Company underwent a "reorganization" by increasing the members of its
founding group to include two of the major participants in the China
Peregrine Enterprises, Limited (CPEL), the corporate General Partner of the
CPEL limited partnership, and a financial consultant. As a result, the total
founders increased from one entity to three individuals and two entities.
Consequently, 788,000 shares of common stock and 500,000 shares of preferred
stock at par value of $0.001 per share were issued to the newly joined
founders, pursuant to the exemption from Section 5 registration provided by
Section 4(2) of the Securities Act of 1933 (the Act). This "reorganization"
resulted from and was part of an overall plan of the new "founders" to
utilize the Company to purchase the assets of CPEL, and operating entity
with business interests in the People's Republic of China.
On February 28, 1997, the Company issued 25,000 shares of common stock
in exchange for 100% of equity interest in Manor Products Corp. (Manor),
pursuant to the safe harbor provisions of Regulation D, Rule 504. Manor was
a Delaware company established on January 10, 1996 without any operating
activities or substantial assets. In early 1996, 80% of equity interest of
Manor was bought by Mr. Paul Downes, a principal of Tamarind Management,
Ltd., the initial founding entity of the Company. Manor had 331 shareholders
and 20,000,000 shares of common stock authorized. As of February 9, 1997,
Manor had 4,090,448 shares outstanding. Pursuant to a merger agreement, each
one thousand shares of Manor were exchanged for one share of common stock of
the Company, with fractional share rounded up to the nearest full share. The
remaining shares of the 25,000 shares of common stock issued by the Company
at that time were issued to this principal individually.
On March 5, 1997, the Company issued 1,040,000 shares of common stock
in exchange for the assets of China Peregrine Enterprises, Limited, pursuant
to Section 4(2) of the Act. China Peregrine Enterprises is a Texas limited
partnership, set up to manage its interest in China operation conducted by a
Chinese joint venture known as Green Food Peregrine Children's Food Co. Ltd.
By this transaction, the Company assumed all of the rights and obligations
of China Peregrine Enterprises in and to this Chinese joint venture. With
the completion of the transaction, the Company became an operating entity.
As a condition to the Company's purchase of China Peregrine
Enterprises' assets, the Company required that all obligations China
Peregrine Enterprises not incurred under the joint venture contract to be
removed from China Peregrine Enterprises' books. Accordingly, three
shareholders of the Company agreed to assume such non joint venture debt,
which consisted of a line of credit obligation existing at the First
Tennessee Bank. On March 15, 1997, the Company issued 1,260,000 shares of
Series B preferred stock, pursuant to Section 4(2) of the Act, at stated
value of $1.00 per share to three shareholders in consideration of their
assumption of the obligation to pay off approximately $1,260,000 of an
outstanding line of credit owed by China Peregrine Enterprises to the
Tennessee-based financial institution. The outstanding line of credit was
incurred by China Peregrine Enterprises during 1995 and 1996 and paid off in
1997. Two of the three shareholders to whom the Series B shares were issued
were part of the reorganized "founders" group, and the third was a limited
partner in China Peregrine Enterprises.
In the Spring of 1997, the payment of the last installment to satisfy
the capital contribution requirements of the Green Food Peregrine joint
venture contract and Articles of Association for that joint venture company
became due. Payment of this last installment was necessary to secure the
continued involvement of the Company in the joint venture. Accordingly, by
late March, 1997, certain shareholders of the Company loaned sufficient
funds to pay the capital contribution installment then due. On May 1,1997,
the Company closed a Rule 504, Regulation D, limited public offering of
975,000 units, each unit consisting of one share of common stock and a
warrant for one share of common stock, at $1.00 per unit to raise money to
repay these loans, the proceeds of which had been utilized to pay the
required capital contribution. The net proceeds of this offering amounted to
$975,000. All of the proceeds of this limited public offering were earmarked
for and utilized to repay the shareholders loans. This 504 offering was
combined with the issuance of 25,000 shares by the Company in the above
discussed merger transaction with Manor Corp. for reporting and integration
purposes. The common stock underlying the warrants were not part of this 504
offering, having an exercise date deferred for one year. This offering
closed May 1, 1997.
Subsequent to Rule 504, Regulation D offering, the Company conducted a
separate private placement to issue 1,520,000 shares of its common stock at
$1.00 per share, commencing May 2, 1997, to raise funds for general working
capital. The total proceeds from this Section 4(2) private placement, which
closed May 31, 1997, amounted to $1,520,000. All subscribers were required
to execute subscription agreements and a questionnaire, which qualified them
as "accredited" investors. These purchasers were existing shareholders,
having participated in the 504 offering, or were associates of such 504
investors.
During 1997, the Company incurred consulting, legal and accounting
expenses relating to these fund raising activities, and other directors'
fees and travel expenses. The Company issued a total of 469,000 shares of
common stock at $1.00 per share for these expenses, pursuant to Section
4(2). Each recipient of these shares had worked closely with management of
the Company and had access to detailed corporate information.
<TABLE>
<CAPTION>
Description Date Shares Identity
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Assumption of CPEL's accrued legal 03/15/97 200,000 Peregrine Enterprises, Inc.
fees
Issuance of stock for legal fees 03/30/97 15,000 Roy D. Toulan, Jr.
relating to fund raising
Issuance of stock for stock 04/15/97 100,000 Continental Capital & Equity
promotion service Corporation
Issuance of stock for promotion 05/01/97 35,000 Robert Mazzei (10,000); Settondown
services Capital Int'l (10,000); John Bannon
(10,000); Carol Bowes (5,000)
Issuance of stock for financial 06/01/97 10,000 Manchester Asset Management, Ltd.
consultation services
Issuance of stock for consulting 07/01/97 24,000 Susan Lurvey (12,000); Dennison
service Chapman (12,000)
Issuance of stock for accounting 10/01/97 15,000 Seymour Borislow (10,000)
service Jeffrey Factor (5,000)
Issuance of stock for consulting 10/15/97 25,000 David Dreyer
service
Issuance of stock for a directors' fee 11/01/97 25,000 Philip Pearce
Issuance of stock for travel expense 11/17/97 20,000 Tamarind Management Ltd.(15,000)
Dale Reese (5,000)
- ----------------------------------------------------------------------------------------------------
</TABLE>
During 1997, the Company signed a total of four stock options
agreements with certain shareholders and non-employee directors for
restricted shares pursuant to Section 4(2) of the Act. These four stock
option agreements are summarized as follows:
<TABLE>
<CAPTION>
Granting Options Exercise Vesting Expiration
Date Granted Price Period Date
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Agreement One 4/29/97 1,005,533 $1.00 None 4/28/2002
Agreement Two 4/30/97 2,000,000 $1.00 None 4/29/2002
Agreement Three 10/1/97 25,000 $1.00 None 9/30/2002
Agreement Four 10/1/97 15,000 $1.00 None 9/30/2002
- ----------------------------------------------------------------------------------
Total options granted in 1997 3,045,533 -none exercised
---------
</TABLE>
FISCAL YEAR 1998
On January 15, 1998, the Company issued 50,000 shares of common stock
at $1.00 per share to Settondown International, Ltd. (Settondown) in
exchange for services by that capital service company, pursuant to Section
4(2) of the Act. Settondown has consulted with the Company and its
reorganization "founders" from early 1997. Settondown's business involves
consultation and finder services for corporate financing on a private and
limited basis.
On February 2, 1998, the Company issued 5,272 shares of common stock
at $2.25 per share to Kenneth G. Hanson in exchange for his services in
connection with the furnishing of the Company's corporate office, pursuant
to Section 4(2) of the Act. Mr. Hanson was an existing shareholder of the
Company and gained detailed knowledge of the business and operations of the
Company through his access to top level management at the Company's
corporate offices.
On February 19, 1998, the Company issued 120,000 shares of common
stock at a price of $1.00 per share to Amer-China Partners, Limited (ACPL)
pursuant to a signed agreement dated October 1, 1997, to acquire ACPL's
entire interest and right (2.4%) in and to the Green Food Peregrine
Children's Food Co. Ltd., pursuant to Section 4(2) of the Act.
On May 2, 1998, the Company issued 557,000 units (each unit composed
of one share of common stock and one warrant to purchase one share of common
stock) at a price of $2.50 per unit, pursuant to a private offering in
accordance with the exemption provided in Regulation D, Rule 506. The net
proceeds of this offering were $1,531,685. Among the 557,000 shares issued,
2,000 shares were issued in exchange for accounting services. The holders of
such warrants are entitled to purchase, from time to time, up to 557,000
shares of common stock, per value $0.001 per share, at an exercise price of
$1.00 per share, at any time after June 30, 1998 and through and including
June 30, 2003. The 557,000 shares were sold to 33 purchasers who, with one
exception, all qualified as "accredited" investors.
On June 19, 1998, the Company entered into a definitive agreement with
American Flavors China, Inc., a U.S.-based entity, to acquire its 52% equity
interest in Hangzhou Meilijian Dairy Products Co. Ltd. (Hangzhou Meilijian).
The Boards of Directors of both companies and of the joint venture have
approved the acquisition. Hangzhou Dairy Co. Ltd., a state-owned enterprise
in Zhejian Province of China, controls the remaining 48% of equity interest
in Hangzhou Meilijian. The aforesaid acquisition is subject to approval by
the local government authorities, which presently is pending. The terms of
the acquisition agreement, in part, resulted in the issue of 1,513,685
shares of the Company's common stock to American Flavors China, Inc.,
pursuant to Section 4(2) of the Act. The negotiations for this purchase
covered a time period of approximately one year. During that time, the
principals at American Flavors China, Inc. were given appropriate corporate
information concerning the business and operations of the Company.
Between December 17, 1998 and February 18, 1999, the Company issued
265,000 shares of its Common Stock to 15 holders of Warrants, issued May 1,
1997, as a result of the exercise of those Warrants. All investors receiving
these shares were shareholders of the Company and are "accredited"
investors. The proceeds from this exercise aggregated $265,000.
On May 2, 1998, the Company approved and ratified an agreement between
the Company and China National Green Food for the increase of the Company's
equity interest in Green Food Peregrine from 70% (assuming the approval of
the Amer-China transfer) to 76.92%. This change in the ownership ratio will
take place upon the payment of an additional US $1,500,000 in registered
capital by the Company over an eighteen month period. Since Chinese
government regulations require approval of this change of the investment
ratio by the Ministry of Foreign Trade and Economic Cooperation, the Company
has agreed to an interim loan of US $500,000 to Green Food Peregrine, with
the conversion of that loan to registered capital upon obtaining the
required governmental approval. To fund this equity increase, commencing on
October 21, 1998, the Company initiated a limited public offering of its
Series C Convertible Preferred Stock, pursuant to Rule 504 of Regulation D.
On November 19, 1998, the Company issued 83,334 shares of its Series C
Convertible Preferred Stock, plus a like number of Warrants, at a price of
$3.00 per share (including the Warrants) to Utah Resources International,
Inc., a sophisticated investor, resulting in proceeds of $250,000.
Subsequently, on December 29, 1998, this Rule 504 limited public offering
was amended to offer and issue 50,000 shares of like Series D Convertible
Preferred Stock, plus nine Warrants per share, at a price of $3.00 per share
(including Warrants), to Explorer Fund Management, Inc., a sophisticated
investor, resulting in proceeds of $150,000. The aggregate proceeds received
from this initial and amended Rule 504 limited public offering, which closed
January 4, 1999, amounted to $400,000.
FISCAL YEAR 1999
Section 4(2) Issues
- -------------------
During the period February 2, 1999 through February 18, 1999, the
Company issued 100,000 shares of its common stock to four accredited and/or
sophisticated investors, resulting from the exercise of common stock
warrants issued to these investors in 1997 as part of a Section 4(2)/ Rule
506 offering.
From March 4, 1999 through April 21, 1999, the Company issued 315,000
shares of its common stock to twelve accredited and/or sophisticated
investors, who were known to the Company or existing shareholders of the
Company.
On May 28, 1999, the Company issued 145,000 shares of common stock to
seven accredited/sophisticated investors; on June 25, 1999, the Company
issued 117,200 shares of common stock to four accredited/sophisticated
investors; and on September 16, 1999, the Company issued 65,000 shares of
common stock to three accredited/sophisticated investors.
Each above described issuance of the Company's common stock was
pursuant to Section 4(2) of the Securities Act of 1933 and was made pursuant
to and based upon the qualification of each investor, including
representations as to the investment purpose of each such purchase.
Series C Preferred - Conversions
- --------------------------------
On January 5, 1999 and January 7, 1999, respectively, the Company
issued 13,959 shares of its common stock to Utah Resources International,
Inc., pursuant to its conversion of the Company's Series C Convertible
Preferred Stock. On February 5, 1999 and March 3, 1999, the Company issued
the aggregate of 80,000 shares of its common stock pursuant to conversions
by Utah Resources. In addition, at that time, the Company issued 150,000
shares of its common stock to Explorer Fund Management, Inc., pursuant to
its conversion of 50,000 shares of the Company's Series C Convertible
Preferred Stock.
On March 23, 1999 and May 19, 1999, respectively, the Company issues
common stock aggregating 83,334 shares to Utah Resources pursuant to its
Series C conversions. Subsequent conversions of Series C Preferred by Utah
Resources resulted in the issuance of 20,000 shares of common stock on July
30, 1999, 30,000 shares of common stock on October 20, 1999 and 134,000
shares of common stock on November 16, 1999.
Series D Preferred - Issues
- ---------------------------
On March 9, 1999 and April 23, 1999, respectively, the Company issued
53,500 and 25,000 shares of its Series D Convertible Preferred Stock to
three accredited and/or sophisticated corporate investors and one finder.
The gross proceeds from this offer aggregated $750,000. These shares of
Series D Convertible Preferred Stock were issued in reliance upon the
exemption from registration provided in Rule 506 of Regulation D and Section
4(2) of the Securities Act of 1933, and the proceeds therefrom were used for
general working capital. The issue consisted of the Series D Convertible
Preferred Stock at $10.00 per share, with Warrants to: Austinvest Anstalt
Balzers, 16,250 Series D/16,250 warrants for $162,500; Esquire Trade &
Finance Inc.,16,250 Series D/16,250 warrants for $162,500; Amro
International, S.A., 17,500 Series D/17,500 warrants for $175,000. The
Company filed an SB-2 registration statement on April 16, 1999, with respect
to resale of the shares of common stock underlying the Series D Convertible
Preferred and the warrants.
Series E Preferred - Issues
- ---------------------------
During July, August and September 1999, the Company conducted a
private sale of Series E Convertible Preferred Stock and issued 330,000
shares in five traunches to twenty-four accredited and sophisticated
investors at $2.50 per share, as follows:
<TABLE>
<S> <C>
July 23, 1999 - 100,000 Series E shares and warrants for 50,000 common to seven investors
Aug. 16, 1999 - 30,000 Series E shares and warrants for 15,000 common to three investors
Sept. 1, 1999 - 60,000 Series E shares and warrants for 30,000 common to three investors
Sept. 14, 1999 - 40,000 Series E shares and warrants for 52,000 common to three investors
Sept. 27, 1999 - 100,000 Series E shares and warrants for 50,000 common to eight investors
</TABLE>
These investor warrants and finder warrants are exercisable as
follows:
<TABLE>
<CAPTION>
Underlying Exercise
Closing Date Common Price Expire
- ------------ ---------- -------- ------
<S> <C> <C> <C>
July 23, 1999
Investors 50,000 $3.00/share 7-22-01
Finder 10,000 $2.75/share 7-22-04
Finder 10,000 $5.00/share 7-22-02
August 16, 1999
Investors 15,000 $3.00/share 8-15-01
Finder 3,000 $2.75/share 8-15-04
Finder 3,000 $5.00/share 8-15-02
September 1,1999
Investors 30,000 $3.00/share 8-31-01
Finder 6,000 $2.75/share 8-31-04
Finder 6,000 $5.00/share 8-31-02
September 14,1999
Investors 20,000 $3.00/share 9-13-01
Finder 4,000 $2.75/share 9-13-04
Finder 4,000 $5.00/share 9-13-02
September 27, 1999
Investors 50,000 $3.00/share 9-26-01
Finder 10,000 $2.75/share 9-26-04
Finder 10,000 $5.00/share 9-26-02
No Series E Warrants have been exercised
</TABLE>
The issuance of this Series E Preferred Stock and warrants was
pursuant to an exemption from registration provided by Rule 506 of
Regulation D. The proceeds of the sale of the Series E Preferred Stock were
utilized for working capital. The net proceeds of this issuance were
$711,963 net of $113,037 of finder's fee, legal and printing expenses.
Series E Preferred - Conversions
- --------------------------------
On July 29, 1999, four holders of Series E Preferred Stock converted
60,000 shares into 104,896 shares of common stock. In addition, four holders
converted a total of 50,000 shares of Series E Preferred Stock into 89,444
shares of common stock on August 3, 1999 (40,000 shares) and August 23, 1999
(10,000 shares), respectively. The issuance of the common stock underlying
the Series E Preferred Stock was pursuant to an exemption from registration
provided by Rule 506 of Regulation D. On October 29, 1999, sixteen
accredited and sophisticated investors holding Convertible Preferred Stock
Series E, converted a total of 220,000 shares of Preferred Stock Series E
into 440,000 shares of common stock. The Company did not realize any
proceeds upon the conversion of the Series E Preferred Stock to common
stock. All of the Series E Preferred stock has been converted.
Section 4(2) - Consultant Issues
- --------------------------------
During 1999, the Company issued 11,303 shares of common stock were
issued to The Omega Group for dairy consulting services rendered, as
follows:
<TABLE>
<S> <C>
May 28, 1999 4048 shares
June 25, 1999 1999 shares
August 16, 1999 2356 shares
October 14, 1999 1163 shares
December 2, 1999 1737 shares
</TABLE>
These shares of common stock were issued at market value and were
issued in reliance upon the exemption from registration provided in Section
4(2) of the Securities Act of 1933.
Warrants and Options
- --------------------
On June 15, 1999, the Company issued a total of five stock options
agreements with certain non-shareholders and non-employees, who had provided
bookkeeping, research and organizational services, for 55,000 restricted
shares of common stock pursuant to Section 4(2) of the Act. These options
contain an exercise price of $1.00 per share and expire in five (5) years.
During October 1999, the Company signed stock option agreements with
three non-employees who are to provide advisory and consulting services to
the Company, for a total of 1,016,000 shares of common stock pursuant to
Form S-8 registration statement under the 1933 Act. These option agreements
contain an exercise price of $0.50 per share for 516,000 options and an
exercise price of $0.75 per share for 500,000 options. These option
agreements expire on October 17, 2000. Accordingly, the Company will
recognize a non-employee compensation cost of $467,360.
Subsequent Events
- -----------------
Subsequent Events
- -----------------
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 an additional 50,000 shares of the Series D Preferred and
warrants for 1,300,000 shares of common stock to the existing holders of
the Company's Series D Preferred Stock. This amended offering resulted in
gross proceeds of $500,000. The Series D Preferred has a Stated Value of
$10.00 per share and is convertible at 80% of market. 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 175,000 shares of its common stock to such holders
pursuant to Regulation D, having a value equal to the $0.75 per share
February 1, 2000 market value for the Company's common stock.
On February 7, 2000, the Company signed agreements with two non-
employees who have provided graphic design and legal services to the
Company, for the issuance of a total of 131,314 shares of common stock
pursuant to a 1933 Act Form S-8 registration statement to be filed by the
Company. The common stock underlying these agreements is 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. The Company
anticipates the filing of a Form S-8 with respect to these shares prior to
May 1, 2000.
On April 7, 2000, the Company closed a Rule 506, Regulation D exempt
offering for 150,000 shares of its Series F Convertible Preferred Stock,
having a per share Stated Value of $10.00, and Warrants which entitle the
holders of the Series F Preferred to purchase an aggregate of 3,000,000
shares of common stock. This offering resulted in gross proceeds of
$1,500,000. Each Preferred share is convertible to the common stock of the
Company at a per common share conversion price of $0.50, based upon the
Stated Value divided by conversion price times the number of shares to be
converted. The Series F Preferred have no voting rights or redemption
features and no dividends rights beyond those attributable to the Company's
common stock. The Warrants for 3,000,000 shares of common stock have an
exercise price of $1.00 per share and are exercisable immediately for a
three year period. The Company can call 50% of Warrants if its common stock
trades at 200% of the April 7, 2000 Closing Date price of $0.75 per share
for 10 consecutive trading days, and 100% of the Warrants if its common
stock trades at 300% of the April 7, 2000 Closing Date price of $0.75 per
share for 10 consecutive trading days. In addition, the Company issued a
Warrant to a consultant in connection with this transaction, which entitles
the holder to purchase an aggregate of 1,600,000 shares of common stock at
an exercise price of $0.84 per share. The Warrant is exercisable
immediately for a three year period and has the same "call" provisions as
the investor Warrants described above. This transaction provides for total
potential proceeds of $5,844,000, based upon the issuance of a maximum of
7,600,000 shares of common stock underlying the Series F Preferred and the
Warrants, at an average price per share of $0.77. The holders of the
Preferred and the Warrants have certain registration rights for the resale
of the Company's common stock underlying the Series F Convertible Preferred
and the warrants.
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND OPERATIONS
YEARS ENDED DECEMBER 31, 1998 AND 1999
INTRODUCTION
Change of Business Focus
- ------------------------
In 1997, the Company's business strategy was to implement a
comprehensive manufacturing, distribution and marketing plan that would
allow the Company to operate its Chinese operations toward profitability
and to expand the joint venture business into new markets with dairy and
non-dairy food products. This strategy envisioned the creation of a
nationwide network of state-of-the-art manufacturing facilities to process
products and deliver fresh refrigerated pasteurized milk to the local
consumer initially in Shanghai and, commencing in the third quarter of
1998, in Hangzhou, People's Republic of China. Such facilities would have
allowed the Company to develop its position as an effective competitor in
the dairy business in major cities in China and allow for the expansion of
the Company's business into other dairy and non-dairy food products.
To implement this plan, in 1997 the Company purchased the majority
equity interest in Green Food Peregrine, located in Shanghai, through a
reverse merger with China Peregrine Enterprise Limited. To date,
approximately $5 million dollars have been invested in the Green Food
Peregrine effort but, despite various business strategies, product shifts
and attempted management changes, Green Food Peregrine's pasteurized milk
business failed to reach economic viability, never having penetrated more
than 3% of the relevant market.
In June 1998, the Company purchased the majority equity interest in
the Hangzhou Meilijian joint venture. Hangzhou Meilijian is the dominant
dairy and juice producer in Hangzhou, a city of 6 million people, with a
70% market share. With new capital invested in advanced processing
equipment, delivery systems, and marketing efforts, this joint venture has
been close to breakeven in 1999 and is planning new product launches in
2000, including Looney Tunes(TM) branded items, that management believes
will result in profitability. Hangzhou Meilijian's sales accounted for 90%
of China Premium's subsidiaries' approximately $5.6 million gross revenues
for the fiscal year ending December 31, 1999.
During 1999, the Company began 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, including premium branded items. In March 1999, a
licensing agreement with Warner Bros. Consumer Products was signed,
permitting the Company to produce and distribute, through its subsidiaries,
a line of high quality, flavored milks branded with the Warner Bros. Looney
Tunes(TM) logos, characters and names. Through taste testing and product
development in the summer and fall of 1999, a line of white and flavored
milk and yogurt drinks for the Chinese urban market was created. These
products each feature a different Looney Tunes(TM) character and have
particular packaging and flavor profiles for each different cartoon
character. Carrefour hypermarkets, Shanghai's largest food retailer,
introduced the first four flavored milks during their October, 1999 20th
anniversary promotion in Shanghai, including Tweety orange milk, Daffy
banana milk, Taz chocolate milk and Silvester vanilla milk. Despite a
retail price premium of 40% over the major competitor's flavored milks,
these new products outsold the competitive brands by 4 to 1, with no
external advertising and minimal in-store promotion.
Beginning in the third quarter of 1999, the Company's management
recognized that Green Food Peregrine would require considerable additional
resources to make any appreciable progress toward profitability. In
addition, in order to take advantage of the new Looney Tunes(TM) products,
planned advertising and promotional support in Shanghai, management
realized that much greater distribution and reach than possible with Green
Food Peregrine was essential for a successful product launch. Coupled with
this realization was the perceived need to change management in Green Food
Peregrine in order to effect greater control by the Company over the day to
day operations of this joint venture and thereby maximize the potential of
the Looney Tunes(TM) product line. When the Company attempted to appoint
and install Western trained management to operate Green Food Peregrine, the
Chinese partner in this joint venture refused to cooperate and was in
violation of the joint venture contract. These events led to a strategic
decision in December 1999 to exit the milk production business in Shanghai.
On January 3, 2000, the Company commenced procedures to terminate the Green
Food Peregrine joint venture and to seek strategic arms-length arrangements
throughout China with large producers of dairy and healthy beverages for
Looney Tunes(TM) product production and distribution. The Company's
business model for these arrangements contemplates the Company's
contribution of its Looney Tunes(TM) production rights, including
advertising and marketing support, with production and distribution of
products handled by existing, well established dairies in China.
Remuneration to China Premium will be based upon a negotiated percentage of
gross revenues realized in the sales of the Looney Tunes(TM) product line.
Currently, the Company is actively soliciting large dairies in China's top
ten cities to implement this new business strategy.
This initiative has moved the Company from a capital intensive
production business in Shanghai toward a business which supplies value
added branded rights and sales support to existing production and
distribution facilities operated by others. In addition, by commencing the
termination of this joint venture, the Company eliminated its ongoing cash
support of the operations of Green Food Peregrine, which constituted the
Company's largest single recurring expenditure. In 1998 and 1999, the
Company advanced $527,779 and $870,589, respectively, to Green Food
Peregrine, with losses on its investment in that joint venture of
$1,066,595 and $1,034,606 for those years.
In December 1999, the Company obtained government approval for the
registration of a wholly owned subsidiary in the Wai Gao Qiao Free Trade
Zone in Shanghai, China. This subsidiary, known as China Premium Food
Corporation (Shanghai) Company, Ltd., offers foreign companies all the
infrastructure necessary to facilitate import/export transactions in China,
including tax and legal compliance, customs and foreign currency exchange.
Pursuant to Wai Gao Qiao rules, this subsidiary can distribute products
that it imports into China, while maintaining reasonable price/profit
margins owing to its status as a direct importer.
In December of 1999, the Company formed Bravo! Foods, Inc., a wholly
owned Delaware subsidiary, which will be utilized to advance the Company's
business plan in the United States of marketing and distributing of a broad
range of food products, including premium branded dairy items. Currently,
the Company is negotiating with several regional dairies for the
production, distribution and sale of branded milk products.
In February of 2000, the Company announced an agreement in principle
to acquire 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. Currently, the Company is working through the
terms and conditions of a definitive agreement with Mandarin.
Basis of Reporting
- ------------------
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.
In initially determining that consolidation of the financial
statements of the Company and its Chinese subsidiaries should be reported
on a consolidated basis, the Company considered the facts and circumstances
of each of these investments in light of the guidance provided by SFAS No.
94 and EITF No. 96-16. Paragraph 13 of SFAS No. 94, "Consolidation of All
Majority-Owned Subsidiaries", states that the "usual condition for a
controlling financial interest is ownership of a majority voting interest....
A majority-owned subsidiary shall not be consolidated if control is likely
to be temporary or if it does not rest with the majority owner (as, for
instance, if the subsidiary... operates under foreign exchange restrictions,
controls, or other governmentally imposed uncertainties so severe that they
cast significant doubt on the parent's ability to control the subsidiary)."
In EITF No. 96-16, the Task Force addressed the question of what rights held
by a minority shareholder would be considered so restrictive as to call
into question whether control rests with the majority owner. The Task
Force reached a consensus that "participating" rights granted to a minority
interest would overcome the presumption in SFAS No. 94 that the majority
investor should consolidate the investee. "Participating" rights were
contrasted by the Task Force to "protective" rights in that "participating"
rights "provide the minority shareholder with the right to effectively
participate in significant decisions that would be expected to be related
to the investee's ordinary course of business...". The existence of
"protective" rights, which the Task Force felt described all minority
rights, would not be sufficient to preclude consolidation.
Based on this framework, the Company believed that GAAP would hold
that a majority shareholder should consolidate its investment in an investee
unless there exists a preponderance of evidence that would rebut the
presumption that control rests with the majority shareholder. In its
analysis, the Company did not perceive the existence of evidence sufficient
to overcome this presumption and, accordingly, reported its financial
affairs, and those of its subsidiaries, on a consolidated basis.
In reviewing the Company's prior filings, the Commission's reviewing
staff analyzed SFAS No. 94 and EITF No. 96-16 considerations and reached a
different conclusion on the consolidation issue. 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 and its subsidiaries' prior
year end financial statements and presented its financial reports for the
year ending December 31, 1999 on the equity method basis rather than on a
consolidated basis.
FINANCIAL CONDITION
General
- -------
For the year ending December 31, 1999, the Company had an accumulated
deficit of US $12,360,537. As of December 31, 1999, the Company had cash
on hand of US $16,854 and reported total shareholders' equity of US
$840,057.
On July 31, 1998, the Company purchased certain assets of American
Flavors China, Inc., consisting of that company's 52%equity interest in and
to a Sino-American joint venture in Hangzhou, People's Republic of China,
known as Hangzhou Meilijian Dairy Products Co., Ltd. For financial
reporting purposes, Hangzhou Meilijian is considered the subsidiary of the
Company as of that date. As of July 31, 1998, Hangzhou Meilijian had total
assets of $6,512,950, with total current assets of $1,928,336. Total
liabilities amounted to $3,544,961, with total current liabilities of
$2,870,890. In addition, the joint venture company had total equity of
$2,967,989, with total revenues of $2,831,255.
As of December 31, 1999, Hangzhou Meilijian had total assets of
$5,483,490, with total current assets of $931,443. Total liabilities
amounted to $3,175,406, with total current liabilities of $2,265,023. In
addition, the joint venture company had total equity of $2,308,084, with
total revenues of $5,664,661.
RESULTS OF OPERATIONS - 1999 OVERVIEW
China Peregrine Year Ended December 31, 1999
- --------------------------------------------
Owing to the change in financial reporting to the equity method, the
Company has not reported any of the revenue of its subsidiaries and,
accordingly, has not reported any sales revenue, cost of goods sold or
selling expenses for the fiscal year ending December 31, 1999. After
general and administrative expenses of $2,622,788 and other net expenses of
$1,394,546, including interest expenses of $15,539, loss on investments in
Green Food Peregrine of $1,034,606 and in Meilijian of $334,401, the
Company had a net loss before income taxes of $4,017,334. This loss,
combined with accrued dividends on preferred stock of $958,177, resulted in
a basic loss per share of $0.67.
The Company's losses on its investments in its Chinese subsidiaries
in 1999 result from the high level of expenses associated with the
continuing attempts to penetrate the market in Shanghai and the
introduction of new products in Hangzhou. In addition, the Company
experienced significant general and administrative expenses in connection
with raising capital in 1999 in excess of $937,000 and expenses associated
with the filing requirements of a fully reporting company under the
Securities Exchange act of 1934.
China Peregrine Year Ended December 31, 1999 Compared to Year Ended
- -------------------------------------------------------------------
December 31, 1998
- -----------------
General and administrative expenses increased approximately 108% to
$2,622,788 in 1999 from $1,260,588 in 1998. This increase reflects three
1999 fund raising exercises, the consummation of licensing agreements with
Warner Bros. with guaranteed royalty payments in 1999 of $87,500, and the
preparation and filing of SEC reporting documents by the Company.
Interest expense increased from a net positive income number in 1998 to
expenses of $15,539 in 1999. The increase in interest expense largely was
a result of the debt associated with the Green Food Peregrine and Hangzhou
Meilijian operations and 10.5% interest on an installment note having a
face value of $282,637, arising out of the acquisition of the Company's
interest in Hangzhou Meilijian in 1998.
Losses on investments in the Company's subsidiaries increased
approximately 13.4% to $1,379,007 in 1999 from $1,215,793 in 1998. The
increase largely was the result of the write off of the entire balance of
the Company's investment in Green Food Peregrine in 1999, when that joint
venture ceased operations and the Company decided to terminate the joint
venture.
Consequently, the Company's net loss increased approximately 63.2% to
$4,017,334 in 1999 from $2,461,829 in 1998. The Company reported a loss
per share of $0.41 in 1998 and $0.67 in 1999. The increase in the loss per
share was due to the change to the equity method of reporting and the write
off of the Company's investment in Green Food Peregrine. As of December
31, 1998, there were 7,717,957 shares of common stock outstanding while as
of December 31, 1999 there were 10,278,129 shares of common stock
outstanding. Due to the timing of issuance of new shares, however, the
weighted average number of shares of common stock outstanding in 1999 was
7,422,965. The loss per share in 1999 increased by approximately 63.4%
compared with 1998.
Hangzhou Meilijian Year Ended December 31, 1999
- -----------------------------------------------
For the fiscal year ending December 31, 1999, Meilijian had net sales
of $5,664,661 and had a gross profit of $768,517. In addition to the
$4,896,144 cost of goods sold, Meilijian had selling expenses of $629,564,
and general and administrative expenses of $664,921. After net interest
expenses of $129,810 and other net expenses of $6,532, Meilijian had a net
loss before income tax of $662,310. General and administrative expenses
are approximately 12% of revenues for 1999. The Company anticipates that
as Meilijian's revenue increases through marketing, general and
administrative expenses will increase in total but decrease as a percentage
of revenue.
Meilijian's loss from operations for 1999 are the result of efforts
associated with the introduction of new products in 1999.
Hangzhou Meilijian Year Ended December 31, 1999 Compared to Year Ended
- ----------------------------------------------------------------------
December 31, 1998
- -----------------
Meilijian's revenues increased almost 16.2% to $5,664,661 in 1999
from $4,873,748 in 1998. The increase was due to the continuing marketing
efforts to increase in sales volume of baggie milk, and the development of
an aseptic milk packaged product for sale in the Hangzhou and other
surrounding markets.
Cost of goods sold increased approximately 15.4% to $4,896,144 in
1999 from $4,241,471 in 1998. This increase was due mainly to a higher
level of revenue that required a corresponding increase in cost of goods
sold. However, cost of goods sold accounting for a percentage of revenue
decreased to 86% in 1999 from 87% in 1998. Consequently, the gross profit
ratio increased to 13.5% in 1999 from 13% in 1998.
Selling expenses increased approximately 41.3% to $629,564 in 1999
from 445,662 in 1998. As a percentage of revenues, selling expense
increased to 11% in 1999 from 9% in 1998. These increases were due mainly
to the continuing efforts to increase sales volume and the introduction of
new products in the Meilijian market area.
Meilijian's general and administrative expenses increased
approximately 59% to $664,921 in 1999 from $415,991 in 1998. This increase
reflects the effects of increased sales and the introduction of new
products in 1999. As a percentage of the total revenue, the general and
administrative expenses increased to 11.7% in 1999 from 8.5% in 1999.
Interest expense decreased approximately 25.9% to $129,810 in 1999
from $175,205 in 1998. The decrease in interest expense largely was a
result of the debt repayment. Meilijian's net loss increased approximately
59% to $662,310 in 1999 from $415,178 in 1998.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1998, the Company reported that net cash used in
operating activities was $981,129, net cash used in investing activities
was $769,868, and net cash provided by financial activities was $1,775,710
with a positive foreign currency translation adjustment of $28,414.
As of December 31, 1999, the Company reported that net cash used in
operating activities was $1,911,100, net cash used in investing activities
was $946,585, and net cash provided by financing activities was $2,569,392
with a negative foreign currency translation adjustment of $86.
Net cash used in operating activities increased approximately 100% to
$1,911,186 in 1999 from $952,715 of net cash used by operating activities
in 1998. The increase in negative cash flow in operating activities
reflects the increased costs experienced in 1999 in supporting the
operations of Green Food Peregrine.
Net cash used in investing activities increased approximately 23% to
$946,585 in 1999 from $769,868 in 1998. The increase mainly was due to
advances to Green Food Peregrine.
Net cash provided by financing activities increased 44.7% to
$2,569,392 in 1999 from $1,775,710 in 1998. The necessity for increased
fund raising activities resulted from increased general and administrative
expenses as well as the continuing support of the operations of Green Food
Peregrine and the implementation of the Warner Bros. licensing agreements.
Going forward, the Company's primary requirements for cash (other
than for acquisition activities) consist of (1) purchasing transportation
equipment for distribution of its products; (2) expenses related to product
development, marketing and advertising in Shanghai, Hangzhou and other
cities where the Company may enter into strategic alliances with local
dairies for the production of Looney Tunes(TM) milk products; (3) payments
of guaranteed royalty payments to Warner Bros. under existing licensing
agreements; and (4) $300,000 in additional capital contributions to the
Hangzhou Meilijian joint venture. The Company estimates that net cash
provided by current operating activities together with cash on hand will
enable the Company to meet the anticipated cash requirements for the 2000
fiscal year.
On February 1 and April 7, 2000, respectively, the Company received
gross proceeds approximating $2,000,000 to fund its working capital and
investment capital needs. 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.
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 in July of this year due to the profitability expected in Meilijian
with new product launches as well as the completion of the Looney Tunes(TM)
production agreements that are now being pursued with other dairies in
China.
In addition, in March of 1999, the Company entered into an exclusive
distribution agreement with Lance Food of Charlotte, NC, for the
distribution of snack foods in China. In December 1999, the Company
received local governmental approval for and established a wholly owned
subsidiary in the the Wai Gao Qiao "Free Trade Zone" in Shanghai, China,
known as China Premium Food Corporation (Shanghai) Company, Ltd. This
subsidiary will handle, among other things, the importation and
distribution of the Lance snack foods in China. The logistic arrangements
have been completed and the first shipment of Lance snacks will be sent to
Shanghai in May.
By reason of the foregoing, management believes that the Company will
have positive cash flow by the third quarter of 2000, without the need for
additional funding to support existing operations.
DEBT STRUCTURE
Hangzhou Meilijian has revolving lines of credit from major state-
owed commercial banks in China for working capital purposes. These lines
of credit allowed the Company to borrow money up to RMB13 million
(approximately US$1,570,000 as of December 31, 1998). These lines of
credit have terms ranging from three months to seven months with a floating
interest rate at July 31, 1998 ranging from 7.5% to 10% per annum subject
to change based on notice from the central bank, People's Bank of China.
In China, these lines of credit are generally renewable as long as Hangzhou
Meilijian pays all interest on a timely basis.
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.
In the course of setting up the Hangzhou Meilijian joint venture, HDC
contributed fixed assets with a value in excess of its required capital
contribution amount. Based on an agreement signed by the Chinese and
American investors, the excess portion was treated as a fixed asset loan
from HDC at an interest 8% per annum. The balance of this loan at December
31, 1998 was $560,080.
On January 1, 1994, HDC provided the Company with the use of its
trademark, which was valued at RMB500,000 (approximately US$60,245). The
Company recorded this trademark value as a part of deferred assets and a
shareholder loan. The Company recorded amortization of RMB50,000
(approximately US$6,025) per year for trademark and paid cash of RMB50,000
to HDC per year against the shareholder loan. The balance of this loan at
December 31, 1998 was $36,238. Accumulated interest on these loans
amounted to $81,265.
EFFECTS OF INFLATION
The Company believes that inflation has not had material effect on
its net sales and results of operations.
EFFECT OF FLUCTUATION IN FOREIGN EXCHANGE RATES
The Company's operating subsidiary, Green Food Peregrine, is located
in China. It buys and sells products in China using Chinese renminbi as
functional currency. Based on Chinese government regulation, all foreign
currencies under the category of current account are allowed to freely
exchange with hard currencies. During the past two years of operation,
there were no significant changes in exchange rates. However, there is no
assurance that there will be no significant change in exchange rates in the
near future.
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 on January 1, 2000
to affect its financial statements.
YEAR 2000 STATEMENT
During the fourth quarter of 1999, the Company evaluated and
implemented changes to computer systems in the United States, as necessary.
This issue affects computer systems that have date sensitive software
programs or chipsets that may not recognize the year 2000. Systems that do
not recognize such information properly could generate erroneous data or
cause a system to fail, resulting in an interruption of normal business
activities.
The Company caused its computers to be analyzed with respect to
potential Year 2000 problems. That analysis has revealed the existence of
one micro computer which, owing to its age, had a high risk of date
sensitive operation; that computer has been replaced. Given the benefit to
the Company of utilizing technology more advanced than exists in its
present computers, and the utilization of readily available "off the shelf"
hardware and software, the Company is prepared to upgrade or replace all
problem computers immediately, where appropriate.
The Company utilizes computers in its United States operation in a
fashion that is non-essential to the day to day business of the Company.
The computers at the North Palm Beach, FL corporate offices function as
word processors for communication purposes and contain some database
information, which is duplicative of files kept by outside legal,
accounting and transfer agent affiliates. In the Hangzhou Meilijian
operation, basic record keeping is both manual and computer assisted. As
such, while downtime owing to date sensitive problems would present an
inconvenience to operations, it would not affect the ability of the
Company's subsidiaries to function appropriately on a day to day basis.
Neither the Company nor its subsidiaries rely upon third parties who
are computer dependent for their respective business functions. As such,
the Company does not believe that Year 2000 problems that may be
experienced by such third parties will have any material effect on its
operations.
ITEM 7 - FINANCIAL STATEMENTS (audited)
FOR YEAR ENDED DECEMBER 31, 1999
CHINA PEREGRINE FOOD CORPORATION
____________________________
FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1999
____________________________
China Peregrine Food Corporation
Index to Financial Statements
Report of Independent Certified Public Accountants F-3
Financial Statements
Balance Sheets F-4
Statements of Operations and Comprehensive Loss F-6
Statement of Shareholders' Equity F-7
Statements of Cash Flows F-9
Summary of Accounting Policies F-13
Notes to Financial Statements F-17
Report of Independent Certified Public Accountants
To the Board of Directors
China Peregrine Food Corporation
We have audited the accompanying balance sheets of China Peregrine Food
Corporation (a Delaware corporation) as of December 31, 1998 and 1999, and
the related statements of operations and comprehensive loss, shareholders'
equity and cash flows for each of the two years in the period ended December
31, 1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards in the United States. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall presentation of the financial statements. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of China Peregrine Food
Corporation as of December 31, 1998 and 1999, and the results of its
operations and its cash flows for each of the two years in the period ended
December 31, 1999 in conformity with generally accepted accounting principles
in the United States.
As discussed in the summary of accounting policies, the financial statements
for the year ended December 31, 1998 have been restated to reflect the
accounting for the Company's investment in its foreign subsidiaries using
the equity method of accounting.
Los Angeles, California
February 25, 2000
CHINA PEREGRINE FOOD CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
------------------------
1998 1999
------------------------
(restated)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 305,233 $ 16,854
Subscription receivable 235,000 -
Prepaid expenses 37,532 18,196
------------------------
Total current assets 557,765 35,050
Furniture and equipment, net 89,198 131,264
Investment in and advance to GFP (Note 1) 164,017 -
Investment in and advance to Meilijian (Note 2) 1,582,578 1,246,422
Goodwill 293,096 229,148
License rights (Note 3) - 214,286
Deposits 5,000 10,000
------------------------
Total assets $2,711,654 $1,866,170
========================
Liabilities and Shareholders' Equity
Current liabilities:
Current portion of note payable (Note 3) $ 58,104 $ 277,741
Accrued liabilities 245,151 250,833
------------------------
Total current liabilities 303,255 528,574
Dividends payable 200,667 370,039
Note payable, less current portion (Note 3) 192,741 127,500
------------------------
Total liabilities 696,663 1,026,113
------------------------
Commitments and contingencies (Note 6)
Shareholders' Equity (Notes 7 and 8 ):
Series A convertible preferred stock, par value $0.001 per share,
500,000 shares authorized, 500,000 shares issued and outstanding 500 500
Series B convertible, 9% cumulative, and redeemable preferred
stock, stated value $1.00 per share, 1,260,000 shares authorized,
1,260,000 shares issued and outstanding, redeemable at $1,260,000 1,260,000 1,260,000
Series C convertible, 8% cumulative and redeemable preferred stock,
stated value $3.00 per share, 83,334 and 14,904 shares issued and
outstanding 250,000 44,713
Series D convertible, 6% cumulative and redeemable preferred stock,
stated value $10.00 per share, 80,250 shares issued and
outstanding at December 31, 1999 - 762,500
Series E convertible, 6% cumulative and redeemable preferred stock,
stated value $2.50 per share, 330,000 shares issued and converted
into common stock, 0 shares outstanding at December 31, 1999 - -
Preferred stock - Series C subscribed 135,000 -
Common stock, par value $0.001 per share, 20,000,000 shares
authorized, 7,717,957 and 10,278,129 shares issued and outstanding 7,718 10,278
Common stock subscribed 100,000 -
Additional paid-in capital 7,781,062 11,256,952
Accumulated deficit (7,385,026) (12,360,537)
Accumulated other comprehensive loss - translation adjustment (134,263) (134,349)
------------------------
Total shareholders' equity 2,014,991 840,057
------------------------
Total liabilities and shareholders' equity $2,711,654 $1,866,170
========================
</TABLE>
See accompanying summary of accounting policies and notes to
financial statements.
CHINA PEREGRINE FOOD CORPORATION
STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------
1998 1999
--------------------------
(restated)
<S> <C> <C>
Revenue $ - $ -
Cost of sales - -
--------------------------
Gross margin - -
General and administrative expense 1,260,588 2,622,788
--------------------------
Loss from operations (1,260,588) (2,622,788)
Other (income) expense:
Interest (income) expense, net (14,552) 15,539
Loss on investment in GFP 972,062 1,034,606
Loss on investment in Meilijian 149,198 344,401
Loss attributed to acquiring 2.4% equity interest in GFP 94,533 -
--------------------------
Operating loss (2,461,829) (4,017,334)
Income taxes (Note 5) - -
--------------------------
Net loss (2,461,829) (4,017,334)
Dividends accrued for Series B preferred stock 113,400 113,400
Dividends accrued for Series C preferred stock 85,551 13,775
Dividends accrued for Series D preferred stock - 714,863
Dividends accrued for Series E preferred stock - 116,139
--------------------------
Net loss applicable to common shares $(2,660,780) $(4,975,511)
==========================
Loss per share $ (0.41) $ (0.67)
==========================
Weighted average number of common shares outstanding 6,430,337 7,422,965
==========================
Comprehensive loss and its components consist of the following:
Net loss $(2,660,780) $(4,975,511)
Foreign currency translation adjustment 28,414 (86)
--------------------------
Comprehensive loss $(2,632,366) $(4,975,597)
==========================
</TABLE>
See accompanying summary of accounting policies and notes to
financial statements.
CHINA PEREGRINE FOOD CORPORATION
STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1999
<TABLE>
<CAPTION>
Accumulated
Preferred Stock Common Stock Other
--------------------- ------------------- Additional Accumulated Stock Comprehensive
Shares Amount Shares Amount Capital Deficit Subscribed Loss Total
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1,
1998 (restated) 1,760,000 $1,260,500 5,289,000 $ 5,289 $ 4,429,110 $ (4,724,246) $ - $(162,677) $ 807,976
Issuance of stock in
exchange for stock
promotion service 50,000 50 49,950 50,000
Issuance of stock to
acquire 2.4% interest
in GFP 120,000 120 119,880 120,000
Issuance of stock in
exchange for furniture
purchases 5,272 5 11,857 11,862
Rule 506 Regulation D
issuance 557,000 557 1,391,943 1,392,500
Issuance of stock to
acquire 52% interest
in Meilijian 1,531,685 1,532 1,530,153 1,531,685
Issuance of stock for
warrants exercised 165,000 165 164,835 100,000 265,000
Issuance of Series C
preferred to Utah
Resource International,
Inc. 83,334 250,000 250,000
Deemed dividends for
Series C preferred
stock 83,334 (83,334) -
Stock subscribed 135,000 135,000
Series B preferred stock
dividends (113,400) (113,400)
Series C preferred stock
dividends (2,217) (2,217)
Net loss (2,461,829) (2,461,829)
Translation adjustments 28,414 28,414
---------------------------------------------------------------------------------------------------------
Balance, December 31,
1998 1,843,334 1,510,500 7,717,957 7,718 7,781,062 (7,385,026) 235,000 (134,263) 2,014,991
Conversion from Series C
to Common (2,393) (7,179) 7,957 8 7,171 - - - -
Conversion from Series C
to Common (1,592) (4,780) 6,002 6 4,774 - - - -
Conversion from Series C
to Common (4,320) (12,960) 20,000 20 12,940 - - - -
Conversion from Series C
to Common (4,320) (12,960) 20,000 20 12,940 - - - -
Section 4(2) private
offering 50,000 135,000 100,000 100 99,900 - (235,000) - -
Conversion from Series C
to Common (50,000) (135,000) 150,000 150 134,850 - - - -
Conversion from Series C
to Common (15,313) (45,939) 40,000 40 45,899 - - - -
Section 4(2) private
offering - - 25,000 25 24,975 - - - 25,000
Section 4(2) private
offering - - 290,000 290 289,710 - - - 290,000
Issuance of Preferred
Stock Series D,
Rule 506 50,000 470,000 - - - - - - 470,000
Issuance of Preferred
Stock Series D
for finder fees 3,500 35,000 - - (35,000) - - - -
Issuance of stock for
warrants exercised - - 30,000 30 29,970 - - - 30,000
Deemed dividends
recognized for Series D - - - - 123,462 (123,462) - - -
Cancellation of common
stock S 4(2) offering - - (105,000) (105) (104,895) - - - (105,000)
Issuance of Preferred
Stock Series D,
Rule 506 25,000 240,000 - - - - - - 240,000
Issuance of Series D
for issuance cost 1,750 17,500 - - (17,500) - - - -
Issuance of stock for
warrants exercised - - 53,334 53 53,281 - - - 53,334
Section 4(2) private
offering - - 145,000 145 144,855 - - - 145,000
Deemed dividends
recognized for
Series D, Tranche - - - - 411,538 (411,538) - - -
Compensation cost for
issuance of stock
options - - - - 48,563 - - - 48,563
Section 4(2) private
offering - - 117,200 117 117,083 - - - 117,200
Issuance of stock for
consulting services - - 1,999 2 1,998 - - - 2,000
Deemed dividends
recognized for
Series D 2nd Tranche - - - - 106,485 (106,485) - - -
Issuance of stock for
consulting services - - 4,084 4 5,996 - - - 6,000
Conversion from Series C
to Common (7,673) (23,019) 20,000 20 22,999 - - - -
Issuance of Preferred
stock Series E,
Rule 506 100,000 215,746 - - - - - - 215,746
Deemed dividends
recognized for
Series E, 1st Tranche - - - - 62,552 (62,552) - - -
Deemed dividends
recognized for
Series D, 2nd Tranche - - - - 36,017 (36,017) - - -
Conversion from Series E
to Common (60,000) (129,448) 104,896 105 129,343 - - - -
Issuance of stock for
consulting services - - 1,082 1 1,999 - - - 2,000
Conversion from Series E
to Common (40,000) (86,298) 69,444 69 86,229 - - - -
Section 4(2) private
offering - - 65,000 65 64,935 - - - 65,000
Issuance of Preferred
stock Series E,
Rule 506 30,000 64,724 - - - - - - 64,724
Deemed dividends
recognized for
Series E, 2nd Tranche - - - - 26,250 (26,250) - - -
Issuance of stock for
consulting services - - 1,274 2 1,998 - - - 2,000
Conversion from Series E
to Common (10,000) (21,575) 20,000 20 21,555 - - - -
Issuance of Preferred
stock Series E,
Rule 506 60,000 129,448 - - - - - - 129,448
Deemed dividends
recognized for
Series E, 3rd Tranche - - - - 22,500 (22,500) - - -
Issuance of Preferred
stock Series E,
Rule 506 40,000 86,298 - - - - - - 86,298
Issuance of Preferred
stock Series E,
Rule 506 100,000 215,746 - - - - - - 215,746
Issuance of stock for
consulting services - - 1,163 1 1,999 - - - 2,000
Conversion from Series C
to Common (6,961) (20,883) 30,000 30 20,853 - - - -
Conversion from Series E
to Common (180,000) (388,340) 360,000 360 387,980 - - - -
Conversion from Series E
to Common (40,000) (86,294) 80,000 80 86,214 - - - -
Issuance of stock for
exercise of S-8 options - - 250,000 250 124,750 - - - 125,000
Issuance of stock for
exercise of S-8 options - - 250,000 250 124,750 - - - 125,000
Issuance of stock for
exercise of S-8 options - - 266,000 266 187,234 - - - 187,500
Conversion from Series C
to Common 25,858 (77,574) 134,000 134 77,440 - - - -
Issuance of stock for
consulting services - - 1,737 2 1,998 - - - 2,000
Accrued dividends for
Series B - - - - - (113,400) - - (113,400)
Accrued dividends for
Series C - - - - - (13,775) - - (13,775)
Accrued dividends for
Series D - - - - - (37,361) - - (37,361)
Accrued dividends for
Series E - - - - - (4,837) - - (4,837)
Compensation related to
issuance of stock
options and warrants - - - - 467,300 - - - 467,300
Net loss - - - - - (4,017,334) - - (4,017,334)
Translation adjustment - - - - - - - (86) (86)
---------------------------------------------------------------------------------------------------------
Balance, December 31,
1999 1,855,154 $2,067,713 10,278,129 $10,278 $11,256,952 $(12,360,537) $ - $(134,349) $ 840,057
========================================================================================================
</TABLE>
See accompanying summary of accounting policies and notes to
financial statements.
CHINA PEREGRINE FOOD CORPORATION
STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------
1998 1999
-----------------------------
(restated)
<S> <S> <S>
Cash flows from operating activities:
Net loss $(2,461,829) $(4,017,334)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 46,709 175,261
Issuance of common stock for issuance cost - 6,000
Compensation for stock option - 515,863
Stock issuance in exchange for services 50,000 10,000
Investment loss in GFP 1,038,397 1,034,606
Investment loss in Meilijian 148,984 344,487
Increase (decrease) in cash from changes in:
Prepaid expenses 65,452 19,336
Accounts payable (1,768) (5,000)
Accrued liabilities 132,928 5,681
----------------------------
Net cash used in operating activities (981,129) (1,911,100)
----------------------------
Cash flows from investing activities
Purchase of equipment and machinery (5,109) (67,666)
Advances to GFP (527,779) (870.589)
Advance to Meilijian - (8,330)
Acquisition of investment in Advances to Meilijian (236,980) -
----------------------------
Net cash used in investing activities: (769,868) (946,585)
----------------------------
Cash flows from financing activities:
Repayment of note payable (31,790) (145,604)
Proceeds of Series C preferred stock 250,000 -
Proceeds of Series D preferred stock - 710,000
Proceeds of Series E preferred stock - 711,962
Proceeds from issuance of common stock 1,392,500 537,200
Proceeds from stock subscription - 235,000
Proceeds from warrants and options exercised 165,000 520,834
----------------------------
Net cash provided by financing activities 1,775,710 2,569,392
----------------------------
Net increase in cash and cash equivalents 24,713 (288,293)
Effect of changes in exchange rate on cash 28,414 (86)
Cash and cash equivalents, beginning of year 252,106 305,233
----------------------------
Cash and cash equivalents, end of year $ 305,233 $ 16,854
============================
Cash paid during the year:
Interest $ 11,707 $ 21,646
===========================
</TABLE>
Supplemental Disclosure of Non-Cash Activities:
In January 1998, the Company issued 50,000 shares of common stock at $1.00
per share in exchange for stock promotion services provided by a capital
service company.
On February 2, 1998, the Company issued 5,272 shares of common stock at
$2.25 per share to an individual in exchange for his services in connection
with the furnishing of the Company's corporate office.
On February 19, 1998 the Company issued 120,000 shares of common stock at
$1.00 per share to Amer-China Partners, Limited (ACPL) pursuant to a signed
agreement dated October 1, 1997 to acquire all of ACPL's interest and
rights (2.4%) in and to the Green Food Peregrine Children's Food Co. Ltd.
On May 2, 1998 as part of a Rule 506 Regulation D offering, the Company
issued 2,000 shares of common stock at $2.50 per share in exchange for
accounting services provided by two existing shareholders.
On August 8, 1998 the Company issued 1,531,685 shares of common stock at
$1.00 per share as consideration for 52% of American Flavor China's all
interest in and rights to Hangzhou Meilijian Dairy Products Co. Ltd.
On December 29, 1998, the Company sold 50,000 shares of Series C preferred
stock to an institutional investor at $3.00 per share with 450,000 warrants
attached at an exercise price of $1.00 per shares expiring at April 30,
1999. Accordingly, the Company recorded a stock subscription of $135,000,
net of expense of $15,000 as of December 31, 1998. The Company received
the proceeds of $135,000 on January 4, 1999.
In October 1998, the Board of Directors of the Company decided to reduce
the exercise price of warrants issued during the Rule 504, Regulation D
offering in 1997 from $5.00 to $1.00. Subsequently, certain holders of
265,000 warrants exercised their warrants at $1.00 per share. The Company
issued 165,000 shares of common stock in December and recorded $100,000 of
stock subscribed as of December 31, 1998, which has been fully collected in
February 1999.
An institutional holder of Preferred Stock Series C converted 27,938 shares
into 93,959 shares of common stock from January 4, 1999 through to February
23, 1999.
An institutional holder of Preferred Stock Series C converted a total of
50,000 shares of Preferred Stock Series C into 150,000 shares of common
stock on February 18, 1999 and February 19, 1999, respectively, (25,000
shares per each conversion)
During March 1999 the Company issued 3,500 shares of Preferred Stock Series
D at $10 per share to pay the relevant finder's fee for the first tranche
of 50,000 shares of Preferred Stock Series D.
During April 1999, the Company issued 1,750 shares of Preferred Stock
Series D at $10 per share to pay the relevant finder's fee for the second
tranche of 25,000 shares of Preferred Stock Series D.
During June 1999, the Company issued 1,999 shares of common stock at $1 per
share in exchange for $2,000 of consulting fees and 4,084 shares of common
stock at approximately $1.47 of market price in exchange for $6,000 of
consulting fees with the same consulting service provider.
During June 1999, the Company signed stock option agreements with five non-
employees, who had provided bookkeeping, research and organization services
to the Company, for a total of 55,000 restrictive shares of common stock.
These option agreements contain an exercise price of $1 per share and
expire in five years. Accordingly, the Company recognized non-employee
compensation cost of $48,563.
During July 1999, an institutional holder of Preferred Stock Series C
converted 7,673 shares into 20,000 shares of common stock.
During July 1999, four holders of Preferred Stock Series E converted 60,000
shares into 104,896 shares of common stock.
During August 1999, the Company issued 1,082 shares of common stock at a
market price of $1.85 per share in exchange for $2,000 of consulting fees
and 1,274 shares of common stock at a market price of $1.57 per share in
exchange for a further $2,000 of consulting fees with the same service
provider.
Four accredited and sophisticated investors converted a total of 50,000
shares of Preferred Stock Series E into 89,444 shares of common stock on
August 3, 1999 (40,000 shares), and August 23, 1999 (10,000 shares),
respectively.
During October 1999, an institutional holder of Preferred Stock Series C
converted 6,961 shares into 30,000 shares of common stock.
During October 1999, four holders of Preferred Stock Series E converted
220,000 shares into 440,000 shares of common stock.
During November 1999, an institutional holder of Preferred Stock Series C
converted 25,858 shares into 134,000 shares of common stock.
See accompanying summary of accounting policies and notes to
financial statements.
CHINA PEREGRINE FOOD CORPORATION
SUMMARY OF ACCOUNTING POLICIES
Basis of Presentation and Restatement
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 its
current name.
In February, 1997, the Company issued 25,000 shares of common stock to
acquire a 100% equity interest in Manor Products Corp. (Manor), a Delaware
company, established on January 26, 1996. Manor was a shell company with
331 shareholders.
On March 5, 1997, the Company issued 1,040,000 shares of its common stock
in exchange for a 100% equity interest in China Peregrine Enterprise,
Limited (CPEL). CPEL was a Texas limited partnership, which was created
for the sole purpose of controlling the operation of a joint venture in
Shanghai, China known as Green Food Peregrine Children's Food Co. Ltd.
Green Food Peregrine Children's Food Co. Ltd. (GFP) is a foreign investment
equity joint venture with registered capital of US$5 million and
established under the law of People's Republic of China on July 3, 1993.
The Company accounted for 67.6%, China National Green Food Corporation
accounted for 30%, and Amer-China, an Illinois limited partnership,
accounted for 2.4% of the GFP's equity interest as of December 31, 1997.
In February 1998, the company acquired the 2.4% of equity interest owned by
Amer-China in GFP in exchange for 120,000 shares of the Company's common
stock at $1.00 per share. On May 2, 1998, the Company approved and ratified
an agreement with the China National Green Food Corporation to satisfy the
need for additional capital for GFP by the contribution of $1,500,000 by
the Company over the next 18 months. This contribution will constitute an
increase in the registered capital in GFP attributed to the Company and a
commensurate increase in the equity holding of the Company in GFP from 70%
(after the approval of the Company's acquisition of ACPL's equity interest)
to 76.92%.
On June 18, 1998, the Company entered into a definitive agreement with
American Flavor China, Inc. a U.S. based entity to acquire its 52% equity
interest in Hangzhou Meilijian Dairy Products, Co. Ltd. (HMDP). The
acquisition transaction was effective on August 1, 1998. The terms of this
acquisition are as follows: 1) to assume $285,637 of debt of American
Flavor China, Inc., 2) to pay cash of $210,000, and 3) to issue 1,531,685
shares of the Company's common stock at $1 per share. As a result of this
acquisition transaction, the Company recognized goodwill of $319,741, which
will be amortized over a period of five years on a straight-line basis.
The Company's financial statements for the year ended December 31, 1998
have been restated. 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
the 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 1998 and shareholders' equity at December 31, 1998. The financial
statements for the year ended December 31, 1999 were prepared based on the
equity method. On January 3, 2000, the Company commenced to terminate its
interest in GFP. Accordingly, the Company wrote off its investment in and
advance to GFP as of December 31, 1999.
As shown in the accompanying financial statements, the Company has suffered
operating losses since inception and has an accumulated deficit of $7,385,026
and negative working capital at December 31, 1999. Management plans to
improve gross profit margins in its Chinese joint venture and obtain
additional financing. While there is no assurance that funding will be
available or that the Company will be able to improve its margins, the
Company is continuing to actively seek equity and/or debt financing. No
assurances can be given that the Company will be successful in carrying out
its plans. See Subsequent Events for fund raising details at Note 9.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
Furniture and Fixtures
Furniture and fixtures are stated at cost. Depreciation is computed
primarily utilizing the straight-line method over a period of five years.
Maintenance, repairs and minor renewals are charged directly to expenses as
incurred. Additions and betterment to property and equipment are
capitalized. When assets are disposed of, the related cost and accumulated
depreciation thereon are removed from the accounts and any resulting gain
or loss is included in the statement of income.
Goodwill
Goodwill represents the excess of acquisition cost over the net assets
acquired in business combinations in 1998. Goodwill is amortized on a
straight line basis over five years.
Periodically, the Company reviews the recoverability of goodwill as
required by SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of." The measurement of
possible impairment is based primarily on the undiscounted future operating
cash flows without interest charges of the acquired entity over the
remaining amortization period. Based upon its most recent analysis, the
Company believes that no material impairment exists at December 31, 1998.
The assessed recoverability of goodwill will be impacted if estimated
future operating cash flows are not achieved. The amortization expense of
$26,645 and $63,948 was incurred for the years ended December 31, 1998 and
1999, respectively.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of financial
statements and the reported amounts of revenue and expenses during the
reporting period. Among the more significant estimates included in these
financial statements are the estimated allowance for doubtful accounts
receivable and the deferred income tax asset allowance. Actual results
could differ from those estimates.
Fair Value of Financial Instruments
The carrying amount of cash, accrued liabilities and notes payable are
reasonable estimates of their fair value because of the short maturity of
these items. The carrying amounts of the Company's notes payable
approximate fair value because the interest rates on these instruments are
similar to the debt with the same maturity.
Income Taxes
The Company accounts for income taxes using the liability method, which
requires an entity to recognize deferred tax liabilities and assets.
Deferred income taxes are recognized based on the differences between the
tax bases of assets and liabilities and their reported amounts in the
financial statements which will result in taxable or deductible amounts in
future years. Further, the effects of enacted tax laws or rate changes are
included as part of deferred tax expenses or benefits in the period that
covers the enactment date. A valuation allowance is recognized if it is
more likely than not that some portion, or all of, a deferred tax asset
will not be realized.
Accounting for the Impairment of Long Lived Assets and of the long-lived
Assets to Be Disposed of
Statement of the Financial Accounting Standards No. 121 "Accounting for the
Impairment of Long-Lived Assets and for the Long-Lived Assets to be
Disposed Of" (SFAS 121) establishes new guidelines regarding when
impairment losses on long-lived assets, which include plant and equipment,
and certain identifiable intangible assets, should be recognized and how
impairment losses should be measured. The Company has adopted this
accounting standard and its effects on the financial position and the
results of operations were immaterial.
Earnings (Loss) Per Share
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"). The
statement replaces the calculation of primary and fully diluted earnings
(loss) per share with basic and diluted earnings (loss) per share. Basic
earnings (loss) per share includes no dilution and is computed by dividing
income (loss) available to common shareholders by the weighted average
number of shares outstanding during the period. Diluted earnings (loss)
per share reflects the potential dilution of securities that could share in
the earnings of an entity, similar to fully diluted earnings (loss) per
share.
For the years ended December 31, 1998 and 1999, total stock options and
stock warrants of 4,945,867 and 4,263,533 were not included in the
computation of diluted earnings per share because their effect was
antidilutive.
Stock-based Compensation
The Company has adopted Statement of Financial Accounting Standards No.
123, "Accounting for Stock-based Compensation" (SFAS No. 123). The Company
adopts the intrinsic value method of accounting for employee stock options
and disclose the pro forma impact on net income and earnings per share as
if the fair value based method had been applied. For equity instruments,
including stock options issued to non-employee, including directors, the
fair value of the equity instruments or the fair value of the consideration
received, whichever is more readily determinable, is used to determine the
value of services or goods received and the corresponding charge to
operations.
Comprehensive Income (Loss)
During the year ended January 1, 1997 the Company adopted Statement of
Financial Accounting Standard No. 130, "Reporting Comprehensive Income,"
("SFAS 130") issued by the FASB is effective for financial statements with
fiscal years beginning after December 15, 1997. SFAS 130 establishes
standards for reporting and presentation of comprehensive income (loss) and
its components in a full set of general-purpose financial statements. The
Company has chosen to report comprehensive income (loss) in the statements
of operations. Comprehensive income (loss) is comprised of net income and
all changes to stockholders' equity except those due to investments by
owners and distributions to owners. Adoption of SFAS 130 did not have a
material impact on the Company's financial position or results of
operations.
New Accounting Standards Not Yet Adopted
Statement of Financial 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 was originally to be
effective for fiscal years beginning after June 15, 1999. SFAS No. 137 has
deferred the effective date of SFAS 133 to all fiscal quarters of fiscal
years beginning after June 15, 2000. Historically, the Company has not
entered into derivatives contracts either to hedge existing risks or for
speculative purposes. Accordingly, the Company does not expect adoption of
the new standard to affect its financial statements.
Reclassifications
Certain reclassifications have been made to the prior year consolidated
financial statements to conform with the 1998 presentation.
CHINA PEREGRINE FOOD CORPORATION
NOTES TO FINANCIAL STATEMENTS
Note 1. Investment in and Advance to GFP
Investment in and advance to GFP consists of:
<TABLE>
<CAPTION>
December 31,
--------------------------
1998 1999
--------------------------
<S> <C> <C>
Investment in GFP $ 3,500,000 $ 3,500,000
Advance to GFP 527,779 1,398,368
Equity interest in GFP's accumulated deficit (3,863,762) (4,898,368)
--------------------------
Investment in and advance to GFP $ 164,017 $ -
==========================
</TABLE>
From the inception of GFP, the Company recognized the corresponding GFP's
comprehensive loss on its own book. The Company advanced to GFP
approximately $527,779 in 1998 and approximately $870,529 in 1999,
respectively. The Company picked up 70% of total loss in GFP in 1998,
which was $972,062. The Company also wrote off the goodwill of $94,533,
which resulted from the acquisition of 2.4% of equity interest in GFP in
1998. In later 1999, GFP substantially stopped its operation and the
Company decided to terminate this joint venture. Accordingly, the Company
wrote off the entire balance of investment in and advance to GFP as of
December 31, 1999.
Note 2. Investment in and Advance to Meilijian
Investment in and advance to Meilijian consists of:
<TABLE>
<CAPTION>
December 31,
--------------------------
1998 1999
--------------------------
<S> <C> <C>
Investment in Meilijian $ 2,731,831 $ 2,731,831
Advance to Meilijian 188,207 196,537
Equity interest in Meilijian's accumulated
deficit and comprehensive loss (1,337,460) (1,681,946)
--------------------------
Investment in and advance to Meilijian $ 1,582,578 $ 1,246,422
==========================
</TABLE>
The Company acquired the relevant assets, on August 1, 1998, through the
acquisition transaction with America Flavor China, Inc. as follows:
<TABLE>
<CAPTION>
Amount
------
<S> <C>
Investment in Meilijian $2,652,000
Appropriated earnings 79,831
Accumulated deficit (807,853)
Translation adjustment (380,624)
Advance to Meilijian 188,207
</TABLE>
The Company exchanged the relevant consideration with America Flavor China,
Inc. See the details in Basis of Presentation. The Company also paid
$26,980 for due diligence service, which consisted of a part of total
consideration given for this acquisition transaction. In the period of
five-month ended December 31, 1998, the Company recognized a loss in
investment in Meilijian of $149,198, which were the 52% of loss for the
five months in 1998. Accordingly, for the year ended December 31, 1999,
the Company picked up a loss in investment in Meilijian of $344,401.
Note 3. Note Payable
During the process of acquiring from American Flavor China, Inc. the 52% of
equity interest in and to Meilijian, the Company issued a promissory note
to assume the American Flavor's debt owed to a supplier. The face value of
that unsecured note was $282,637 at an interest rate of 10.5% per annum.
The note has a monthly installment payment of $7,250 with 23 payments and a
balloon payment of $159,862 on July 15, 2000. The note has a late charge
article that the Company will be charged 3% of overdue principal and
interest if the note holder does not receive the payment within 15 days of
the monthly payment due date. As of December 31, 1999, the remaining
balance is $192,741.
On January 1, 1999, the Company entered into a license agreement (the
Agreement) with a third party for the right to print cartoon characters, as
defined in the Agreement, on its products. The Company agreed to pay 3%
royalty fee of net invoiced price of each licensed article and a guaranteed
consideration of $300,000 of which $45,000 was paid at inception of the
Agreement, and the balance will be paid by 10 installments of $21,250 each
quarter starting on September 30, 1999 and a balloon payment of $42,500 on
or before March 31, 2002. The Company recorded license right of $300,000,
amortized over a period of three years.
The Company recorded the $300,000 as note payable and the remaining balance
as of December 31, 1999 is as follows:
<TABLE>
<CAPTION>
Amount
------
<S> <C>
Total Long-Term Note Payable $212,500
Less Current Portion 85,000
--------
Long-Term Note Payable $127,500
========
</TABLE>
Note 4. Related Party Transactions
The Company advanced $527,779 in 1998 and $870,529 in 1999 to GFP,
respectively, in accordance with the decision made in 1998 to increase
$1,500,000 in the registered capital in GFP. However, the increase in
registered capital was not approved by Chinese government agency as of
December 31, 1999.
The Company advanced $8,330 to Meilijian in 1999.
Note 5. Income Taxes
The Company is subject to Federal income tax. As the Company experienced
operating losses for the years of 1998 and 1999, no income tax provision
was provided for 1998 and 1999, respectively.
The Company has gross deferred tax assets of approximately $702,000 and
$1,439,000 at December 31, 1998 and 1999, respectively, relating
principally to tax effects of net operating loss carryforwards. In
assessing the recoverability of deferred tax assets, management considers
whether it is more likely than not that the assets will be realized. The
ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which those
temporary differences become deductible. Management considers projected
future taxable income and tax planning strategies in making this
assessment. Based upon the level of historical taxable loss and
projections for future taxable income over the periods in which the
deferred tax items are recognizable for tax reporting purposes, it is more
likely than not the Company will not realize the benefits of these differences
at December 31, 1998 and 1999. As such, management has recorded a
valuation allowance for the full amount of deferred tax assets at December
31, 1998 and 1999.
At December 31, 1999, the Company has available net operating losses of
approximately $4,233,000 for federal income tax purpose, to offset future
taxable income, if any, and expire at various dates through the year 2014
for federal income tax. However, the utilization of net operating losses
may be subject to certain limitations as prescribed by Section 382 of the
Internal Revenue Code.
Note 6. Commitments and Contingencies
Commitments
The Company leases office space at its corporate office in Florida under
operating leases expiring in February, 2004.
Future minimum rental payments required under operating leases as of
December 31, 1999 are as follows:
<TABLE>
<CAPTION>
Years ending December 31, Amount
- ------------------------- ------
<S> <C>
2000 $ 43,042
2001 45,194
2002 47,453
2003 49,826
--------
$185,515
========
</TABLE>
Rental expense for the years ended December 31, 1998 and 1999 was
approximately $66,724 and $42,000, respectively.
In January 1999, Hangzhon United Dairy Company contributed $289,073 worth of
plant and equipment to Meilijian which was recorded in Meilijian's book as
paid in capital. The Company has agreed to contribute approximately
additional $300,000 capital in cash. As of February 25, 2000 the Company has
not paid the $300,000.
Note 7. Shareholders' Equity
1998
On January 15, 1998, the Company issued 50,000 shares of common stock at
$1.00 per share in exchange for stock promotion services provided by a
capital service company.
On February 2, 1998, the Company issued 5,272 shares of common stock at
$2.25 per share to an individual in exchange for his services in connection
with the furnishing of the Company's corporate office.
On May 2, 1998, the Company issued 557,000 units (each unit composed of one
share of common stock and one warrant to purchase one share of common
stock) at a price of $2.50 per unit, pursuant to a private offering in
accordance with the exemption provided in Rule 506, Regulation D. The net
proceeds of this offering were $1,387,500. Among the 557,000 shares
issued, 2,000 shares valued at $5,000 were issued in exchange for
accounting service. The holders of such warrants are entitled to purchase,
from time to time, up to 557,000 shares of common stock, par value $0.001
per share, at an exercise price of $1.00 per share, at any time after June
30, 1998 and through and including June 30, 2003.
On February 19, 1998, the Company issued 120,000 shares of common stock at
a price of $1.00 per share to Amer-China Partners, Limited (ACPL) pursuant
to a signed agreement dated October 1, 1997 to acquire ACPL's entire
interest and right (2.4%) in and to the Green Food Peregrine Children's
Food Co. Ltd.
On July 31, 1998, the Company issued 1,531,685 shares of common stock to
American Flavor China, Inc. to acquire its 52% of equity interest in and to
Hangzhou Meilijian Dairy Products Co. Ltd. at $1.00 per share.
In October, 1998, the Board of Directors of the Company decided to reduce
the exercise price of warrants issued during the Rule 504, Regulation D
offering in 1997 from $5.00 to $1.00. Subsequently, certain holders of
265,000 warrants exercised their warrants at $1.00 per share. The Company
issued 165,000 shares of common stock in December and recorded $100,000 of
stock subscribed as of December 31, 1998, which was fully collected in
February 1999.
In November 19, 1998 the Company conducted a Rule 504 Regulation D offering
to sell Series C preferred stock to two institutional investors in order
for the Company to raise funds to increase its equity capital position in
GFP in 1999. One institutional investor purchased on November 19, 1998
83,334 shares of Series C preferred stock at $3.00 per share with 83,334
warrants attached at an exercise price of $1.00 per share. The other
institutional investor purchased on December 29, 1998 another 50,000 shares
of Series C preferred stock at $3.00 per share with 450,000 warrants
attached at an exercise price of $1.00 per share and the relevant proceeds
were received on January 4, 1999. The total net proceeds of the Rule 504
offering was $385,000, net of offering expense of approximately $15,000.
Each share of Series C preferred stock has the following features: 1)
stated value of $3 per share, 2) dividend accrued at 8% per annum and
payable in cash of common stock at the Company's option and upon
conversion, at the option of the holder, or redemption, 3) no voting right,
4) convertible into common stock, and 5) redeemable at a price up to 110%
of the stated value at the Company's option.
The conversion feature is specified in the offering memorandum as follows:
the number of shares of common stock issuable upon conversion of each share
of Series C preferred stock shall equal (i) the sum of (A) the stated value
per share and (B) at the holder's election accrued and unpaid dividends on
such share, divided by (ii) the conversion price. The conversion price for
each share of Series C convertible preferred stock in effect on any
conversion date shall be the lesser of (a) 75% of the average per share
market price of 10 trading days immediately before the date of the
applicable holder conversion notice or (b) $3.00 per share, provided that,
during the period from November 1, 1998 through February 29, 1999, the
conversion price shall not be less than $1.00 for each share of underlying
common stock (the price floor), which price floor shall be applicable to
the aggregate number of issued and outstanding Series C preferred stock
held by any one holder, as follows: 100% during November 1998; 75% during
December 1998; 50% during January 1999; 25% during February 1999; and no
applicable price floor thereafter.
On November 19, 1998, the Company recognized a deemed dividend $83,334
because of the built-in beneficial conversion feature which allows each
share of preferred stock to be converted into each share of common stock at
75% of market price at issuing date. As a result of implementing the
accrued dividend policy for the Series C preferred stock, the Company
recognized $2,217 of dividends payable to the 83,334 shares of Series C
preferred stock.
Three institutional investors purchased 16,250 shares, 16,250 shares, and
17,500 shares of Series D preferred stock at $10.00 per unit.
Each share of Series D preferred stock entitles the holder to receive or
accrue dividends at the rate of 6% simple interest per annum, which is
payable in cash or common stock quarterly at the Company's option and to
convert into common stock. The payment of dividends shall be made first to
the Series D Convertible preferred stockholders before dividends or other
distributions are made on any common stock, Series A Preferred Stock,
Series B Preferred Stock or Series C Preferred Stock. The Series D
Preferred Stock has no voting rights and is redeemable, at the Company's
option, at a price equal to the greater of (a) 120% of the stated value
plus accrued dividends or (b) the closing bid price of common stock on the
date the notice of redemption is given by the Company.
The number of shares of common stock issuable upon conversion of each share
of Series D Preferred Stock shall equal (i) the sum of (A) the Stated Value
per share and (B) at the holder's election accrued and unpaid dividends on
such share, divided by (ii) the conversion price. The conversion price
shall be equal to the lessor of: (i) 100% of the average of the closing bid
price of the Company's common stock for the trading day immediately
preceding the date of issuance of the shares of Series D Preferred Stock to
the holders, or (ii) 80% of the average of the three lowest closing bid
prices for the 22 trading days immediately preceding the conversion of the
respective shares of Series D Preferred Stock.
The aggregate gross proceeds from selling these 50,000 units was $500,000,
which the Company received on March 10, 1999, net of expense of $30,000.
In addition, the three institutional investors have committed to invest
additional $500,000, which will occur upon the completion of certain 1933
Act registration events as spelled out in the Subscription Agreement. The
finder fees for this fund raising exercise were paid in the form of 3,500
shares of Series D Convertible preferred stock and 50,000 warrants to
purchase the Company's common stock at an exercise price of $2.96 expiring
at March 9, 2002.
1999
An institutional holder of Preferred Stock Series C converted 27,938 shares
into 93,959 shares of common stock from January 4, 1999 through to February
23, 1999.
In January 1999 the Company collected net proceeds of $135,000, net of
issuance expenses of $15,000 and issued 50,000 shares of Preferred stock
Series C accordingly.
An institutional holder of Preferred Stock Series C converted a total of
50,000 shares of Preferred Stock Series C into 150,000 shares of common
stock on February 18, 1999 and February 19, 1999, respectively, (25,000
shares per each conversion).
In March 1999 the Company collected proceeds of $30,000 which represented
30,000 warrants exercised at a price of $1.00 per share and issued 30,000
shares of common stock accordingly. These warrants were issued in November
1998, as part of the Company's Rule 504 offering of its Series C
Convertible Preferred Stock.
From January 1 to March 31, 1999 the Company conducted a private sale of
its common stock and received total proceeds of $415,000 through issuing
415,000 share of common stock. Among $415,000 received, $105,000 were paid
back to investors per their request for cancellation in April, 1999.
Accordingly, 105,000 shares of common stock were cancelled.
In March 1999, the Company conducted a Rule 506, Regulation D offering to
issue 100,000 shares of its Series D Convertible Preferred Stock, with
possible total gross proceeds of $1,000,000. The Company also issued 3,500
shares of the Series D Preferred Stock at a price of $10.00 per share to
pay a finder's fee to a financial institution. On March 9, 1999, the
Company issued 50,000 shares of the Series D Preferred Stock. The net
proceeds of these 50,000 shares of Preferred Stock Series D was $470,000,
net of $15,000 placement fee and $15,000 of legal expense. In line with the
conversion feature embedded in Series D Preferred Stock, the Company
recognized a total of $677,502 of deemed dividends for the period from the
date of issuance to the first date that conversion could occur.
In April 1999, the Company issued 25,000 shares of Preferred Stock Series D
at $10 per share. The net proceeds of this issuance were $240,000, net of
$7,500 of placement fee and $2,500 legal expense. The Company also issued
1,750 shares of Series D Preferred Stock in exchange for a finder's fee at
$10 per share. In line with the conversion feature embedded in Series D
Preferred Stock, the Company recognized $106,485 of deemed dividends for
the second tranche of 26,750 shares of Series D in the second quarter.
During April, the Company issued 53,334 shares of common stock at $1 per
share as the result of exercising 53,334 warrants related to the previous
83,334 shares of Series C Preferred Stock.
During May and June, the Company conducted a private sale of its common
stock and received total proceeds of $262,200 and issued 262,200 shares of
common stock.
During June 1999, the Company issued 1,999 shares of its common stock at a
market price of approximately $1 per share in exchange of $2,000 consulting
fee and 4,084 shares of common stock at a market price of approximate $1.47
per share in exchange for $6,000 of consulting fee with the same consulting
service provider.
During June 1999, the Company signed stock option agreements with five non-
employee people, who had provided bookkeeping, research and organization
services to the Company, for a total of 55,000 restrictive shares of common
stock. These option agreements contain an exercise price of $1 per share
and expire in five years. Accordingly, the Company recognized non-employee
compensation cost of $48,563.
During July 1999, an institutional holder of Preferred Stock Series C
converted 7,672 shares into 20,000 shares of common stock.
During July, August and September 1999, the Company conducted a private
sale of its convertible Preferred Stock Series E and issued 330,000 shares
in five tranches to investors at $2.50 per share. The net proceeds of this
issuance were $711,962 net of $113,038 of finder's fee, legal and printing
expenses. In line with the conversion feature embedded in Series E
Preferred Stock, the Company recognized $62,552 of deemed dividends for the
first tranche, $26,250 and $22,500 of deemed dividends for the second and
third tranche respectively. The deemed dividends were not applicable for
the fourth and fifth tranche respectively because the floor price of $1.25
was higher than the market price on the date of issuance for each tranche.
The Series E Preferred Stock has the following features: The holders of
Series E Convertible Preferred stock shall be entitled to convert such
stock into the Company's common stock at any time subsequent to the
issuance of such stock, subject to a one year "lockup" agreement entered
into by the holders of such stock. The number of shares of common stock
issuable upon conversion of each share of Series E Preferred Stock shall
equal (i) the sum of (A) the Stated Value per share and (B) at the holder's
election accrued and unpaid dividends on such share, divided by (ii) the
conversion price. The conversion price shall be equal to the greater of:
(i) $1.25 per share of common stock or (ii) 80% of the average of the
closing bid prices for the 5 trading days immediately preceding the
conversion of the respective shares of Series E Preferred Stock, but in no
event shall the conversion price be greater than $2.50 per share of common
stock.
During July 1999, four accredited and sophisticated holders of Preferred
Stock Series E converted 60,000 shares into 104,896 shares of common stock.
During August 1999, the Company issued 1,082 shares of common stock at a
market price of $1.85 per share in exchange for $2,000 of consulting fees
and 1,274 shares of common stock at a market price of approximately $1.57
in exchange for a further $2,000 of consulting fees with the same service
provider.
Four accredited and sophisticated investors converted a total of 50,000
shares of Preferred Stock Series E into 89,444 shares of common stock on
August 3, 1999 (40,000 shares), and August 23, 1999 (10,000 shares),
respectively.
During August the Company conducted a private sale of its common stock and
received total proceeds of $65,000 and issued 65,000 shares of common
stock.
During September 1999, the Company issued 1,163 shares of common stock, at
a market price of $1.72 per share, in exchange for $2,000 of consulting fee
to a service provider.
During October 1999, sixteen investors holding Convertible Preferred Stock
Series E, converted a total of 220,000 shares of Preferred Stock Series E
into 440,000 shares of common stock.
An institutional holder of Preferred Stock Series C converted a total of
6,961 shares of Preferred Stock Series C into 30,000 shares of common stock
on October 20, 1999.
Sixteen shareholder of Preferred Stock Series E converted a total 220,000
shares of Preferred Stock Series E into 440,000 shares of common stock on
October 29, 1999 (180,000 shares ) and on November 24, 1999 (40,000
shares).
During October 1999, the Company signed stock option agreements with three
non-employees who are to provide advisory and consulting services to the
Company, for a total of 1,016,000 restrictive shares of common stock.
These option agreements contain an exercise price of $0.50 per share for
516,000 options and an exercise price of $0.75 per share for 500,000
options. Accordingly, the Company has recognized a non-employee
compensation cost of $467,300. 250,000 options were exercised at $0.50 per
option on November 11, 1999, a further 250,000 were exercised on November
18, 1999 at $0.50 per option and 266,000 were exercised on November 23,
1999 at $0.75 per option of which 16,000 shares were in exchange for
$12,000 of legal fee.
On November 26, 1999 an institutional holder of Preferred Stock Series C
converted a total of 25,858 shares of Preferred Stock Series C into 134,000
shares of common stock.
During November 1999, the Company issued 1,713 shares of common stock, at a
market price of $1.15 per share, in exchange for $2,000 of consulting fee
to a service provider.
Note 8. Stock Warrants and Options
In 1997, the Company issued warrants for 975,000 shares of common stock, at
an exercise price of $5.00 per share, as part of the units sold in the Rule
504, Regulation D limited public offering. These warrants may be exercised
at any time after May 31, 1998, and from time to time thereafter through
and including March 31, 1999. The Company also changed the exercise price
for the 975,000 warrants issued in 1997 from $5.00 to $1.00. 165,000
warrants were exercised at $1.00 per share in December 1998. The remaining
810,000 warrants expired on March 31, 1999.
During 1998 557,000 warrants for shares of common stock relating to a Rule
506 Regulation D offering were issued at an exercise price of $1.00 per
share. These warrants had not been exercised as of December 31, 1999 and
expire on June 30, 2003.
During 1998, 553,334 warrants relating to series C Preferred Stock were
issued. 83,334 warrants for shares of common stock were exercised on March
12, 1999 (30,000) and May 19, 1999 (53,334) respectively at an exercise
price $1.00 per share. The remaining 450,000 warrants expired on April 30,
1999.
During 1999 125,000 warrants relating to series D Preferred Stock were
issued at an exercise price of $2.96 per share. These warrants expire
during 2002, and had not been exercised as of December 31, 1999.
During 1999 231,000 warrants relating to series E Preferred Stock were
issued. 33,000 of these warrants were issued at an exercise price of $2.75
per share, 165,000 were issued at an exercise price of $3.00 per share and
33,000 were issued at an exercise price of $5.00 per share. These options
have expiration dates ranging from July 2001 through September 2004. None
of these options had been exercised as of December 31, 1999.
During June 1999, the Company signed stock option agreements with five non-
employees, who had provided bookkeeping, research and organization services
to the Company, for a total of 55,000 restrictive shares of common stock
pursuant to Section 4(2) of the 1933 Act. These option agreements contain
an exercise price of $1 per share and expire in five years. None of these
options had been exercised by December 31, 1999. Using the Black Scholes
option pricing model the Company determined that the fair value of each
option granted was approximately $0.88. Accordingly, pursuant to SFAS No.
123 the Company recognized non-employee compensation cost of $48,563.
The assumption used in the Black Scholes option pricing model in 1999 were
as follows:
<TABLE>
<CAPTION>
Year ended
December 31, 1999
-----------------
<S> <C>
Discount rate - bond yield rate 6.00%
Volatility 42.65%
Expected life 2 years
Expected dividend yield -
</TABLE>
During October 1999, the Company signed stock option agreements with three
non-employees who are to provide advisory and consulting services to the
Company, for a total of 1,016,000 restrictive shares of common stock
pursuant to Section 4(2) of the 1933 Act. These option agreements contain
an exercise price of $0.50 per share for 516,000 options and an exercise
price of $0.75 per share for 500,000 options. These option agreements
expire on October 17, 2000. In November 1999 766,000 options were
exercised.
A further 100,000 options were exercised in January 2000. Using the Black
Scholes option pricing model the Company determined that the fair value of
each option granted was approximately $0.46. Accordingly, pursuant to SFAS
123 the Company recognized a non-employee compensation cost of $467,300.
The assumption used in the Black Scholes option pricing model in 1999 were
as follows:
<TABLE>
<CAPTION>
Year ended
December 31, 1999
-----------------
<S> <C>
Discount rate - bond yield rate 5.45%
Volatility 59%
Expected life 1 year
Expected dividend yield -
</TABLE>
These warrants and stock option agreements are summarized as follows:
<TABLE>
<CAPTION>
Warrants/
Grant Options Exercise Vesting Expiration
Date Granted Price Period Date
------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Warrants issued in Rule 504 Regulation D offering 5/31/97 975,000 $1.00 12 months 3/31/99
Warrants exercised 12/15/98 (165,000) 1.00 None
Warrants expired 3/31/99 (810,000) 1.00
Warrants issued in Rule 506, Regulation D offering 6/02/98 557,000 1.00 None 6/30/03
Warrants issued with Series C Preferred Stock 11/19/98 83,334 1.00 None 5/31/99
Warrants exercised 3/12/99 (30,000) 1.00 None
Warrants exercised 5/19/99 (53,334) 1.00
Warrants issued with Series C Preferred Stock 12/29/98 450,000 1.00 None 4/30/99
Warrants expired 4/30/99 (450,000) 1.00
Warrants issued with Series D Preferred Stock 3/09/99 100,000 2.96 None 3/08/02
Warrants issued with Series D Preferred Stock 4/23/99 25,000 2.96 None 4/22/02
Warrants issued with Series E Preferred Stock 7/23/99 50,000 3.00 None 7/22/01
Warrants issued with Series E Preferred Stock 7/23/99 10,000 2.75 None 7/22/04
Warrants issued with Series E Preferred Stock 7/23/99 10,000 5.00 None 7/22/02
Warrants issued with Series E Preferred Stock 8/16/99 15,000 3.00 None 8/15/01
Warrants issued with Series E Preferred Stock 8/16/99 3,000 2.75 None 8/15/04
Warrants issued with Series E Preferred Stock 8/16/99 3,000 5.00 None 8/15/02
Warrants issued with Series E Preferred Stock 9/01/99 30,000 3.00 None 8/31/01
Warrants issued with Series E Preferred Stock 9/01/99 6,000 2.75 None 8/31/04
Warrants issued with Series E Preferred Stock 9/01/99 6,000 5.00 None 8/31/02
Warrants issued with Series E Preferred Stock 9/14/99 20,000 3.00 None 9/13/01
Warrants issued with Series E Preferred Stock 9/14/99 4,000 2.75 None 9/13/04
Warrants issued with Series E Preferred Stock 9/14/99 4,000 5.00 None 9/13/02
Warrants issued with Series E Preferred Stock 9/27/99 50,000 3.00 None 9/26/01
Warrants issued with Series E Preferred Stock 9/27/99 10,000 2.75 None 9/26/04
Warrants issued with Series E Preferred Stock 9/27/99 10,000 5.00 None 9/26/02
---------
Total outstanding warrants 913,000
=========
Agreement One 4/29/97 1,005,533 $1.00 None 4/28/02
Agreement Two 4/30/97 2,000,000 1.00 None 4/29/02
Agreement Three 10/01/97 25,000 1.00 None 9/30/02
Agreement Four 10/01/97 15,000 1.00 None 9/30/02
Agreement Five 6/15/99 20,000 1.00 None 6/14/01
Agreement Six 6/15/99 20,000 1.00 None 6/14/01
Agreement Seven 6/15/99 5,000 1.00 None 6/14/01
Agreement Eight 6/15/99 5,000 1.00 None 6/14/01
Agreement Nine 6/15/99 5,000 1.00 None 6/14/01
Stock options pursuant to S-8 registration 10/06/99 500,000 0.50 None 10/17/00
Stock options pursuant to S-8 registration 10/06/99 516,000 0.75 None 10/17/00
Options exercised 11/16/99 (250,000) 0.50
Options exercised 11/18/99 (250,000) 0.50
Options exercised 11/23/99 (266,000) 0.75
---------
Total options outstanding at December 31, 1999 3,350,533
=========
</TABLE>
A summary of the status of the Company's stock options and warrants as of
December 31, 1998 and 1999 with changes during the years then ended are
presented below:
<TABLE>
<CAPTION>
Weighted
Average
Exercise
Shares Price
----------------------
<S> <C> <C>
Total warrants and options outstanding and exercisable
at January 1, 1998 4,020,533 $ 1.00
Warrants/options granted (165,000) $ 1.00
Warrants/options exercised 1,090,334 $ 1.00
---------------------
Total warrants and options outstanding and exercisable at
December 31, 1998 4,945,867 $ 1.00
Warrants/options granted 1,427,000 $ 1.27
Warrants/options exercised (849,334) $(0.63)
Warrants/options expired (1,260,000) $(1.00)
---------------------
Total warrants and options outstanding and exercisable at
December 31, 1999 4,263,533 $ 1.16
=====================
Weighted average fair value of options and warrants
granted during 1999 4,263,533 $ 1.16
=====================
</TABLE>
The following table summarizes information about stock options and warrants
outstanding at December 31, 1999:
<TABLE>
<CAPTION>
Warrants/Options Outstanding Options Exercisable
-------------------------------------- -----------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Number Contractual Exercise Number Exercise
Exercise Price Outstanding Life Price Exercisable Price
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$0.75 250,000 0.80 yrs. $0.75 250,000 $0.75
$1.00 3,100,533 2.32 yrs. $1.00 3,100,533 $1.00
$1.00 557,000 3.50 yrs. $1.00 557,000 $1.00
$2.75 33,000 4.66 yrs. $2.75 33,000 $2.75
$2.96 125,000 2.21 yrs. $2.96 125,000 $2.96
$3.00 165,000 1.66 yrs. $3.00 165,000 $3.00
$5.00 33,000 2.66 yrs. $5.00 33,000 $5.00
--------- ---------
4,263,533 2.38 yrs. $1.16 4,263,533 $1.16
========= =========
</TABLE>
Note 9. Subsequent Events
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 and
warrants for 1,300,000 shares of common stock to the existing holders of
the Company's Series D Preferred Stock. This amended offering resulted in
net proceeds of $490,000, net of $10,000 of legal and issuance expenses.
The Series D Preferred has a Stated Value of $10.00 per share and the same
conversion feature disclosed before. 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
175,000 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. These shares are valued at $0.75 per
share in terms of the market value on February 1, 2000 for the Company's
common stock.
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 to be 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.
The Company anticipates the filing of a Form S-8 with respect to these
shares prior to May 1, 2000.
On April 7, 2000, the Company closed a Rule 506, Regulation D exempt
offering for 150,000 shares of Series F Convertible Preferred Stock, having
a per share Stated Value of $10.00, and Warrants which entitle the holders
of the Series F Preferred to purchase an aggregate of 3,000,000 shares of
common stock. This offering resulted in net proceeds of $1,480,000, net of
$20,000 of legal and issuance expenses. Each Preferred share is
convertible to the common stock of the Company at a conversion price of
$0.50 per common share, based upon the Stated Value divided by conversion
price times the number of shares to be converted. The Series F Preferred
have no voting rights or redemption features and no dividends rights beyond
those attributable to the Company's common stock. The Warrants for
3,000,000 shares of common stock have an exercise price of $1.00 per share
and are exercisable immediately for a period of three years. The Company
can call 50% of Warrants if its common stock trades at 200% of the closing
price of $0.75 per share on April 7, 2000 for 10 consecutive trading days
and 100% of the Warrants if its common stock trades at 300% of the closing
price of $0.75 per share on April 7, 2000 for 10 consecutive trading days.
In addition, the Company issued a Warrant to a consultant in connection
with this transaction, which entitles the holder to purchase an aggregate
of 1,600,000 shares of common stock at an exercise price of $0.84 per
share. The Warrant is exercisable immediately for a period of three years
and has the same "call" provisions as the investor Warrants described
above. This entire transaction provides for total potential proceeds of
$5,844,000, based upon the issuance of a maximum of 7,600,000 shares of
common stock underlying the Series F Preferred and the Warrants, at an
average price per share of $0.77. The holders of the Preferred and the
Warrants have certain registration rights for the resale of the Company's
common stock underlying the Series F Convertible Preferred and the
warrants.
ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH INDEPENDENT
ACCOUNTANTS
The Company has not had any changes in or disagreements with its
independent accountants.
PART III
ITEM 9 - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS.
The following table presents directors and executive officers of the
Company as of December 31, 1999 (same as present); directors serve two year
terms.
The current executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Name of Officer Position with the Company
--------------- -------------------------
<S> <C>
Roy G. Warren President, Chief Executive Officer and Director
Stephen Langley Chief Operating Officer (China Operations)
Michael L. Davis Chief Financial Officer
Susan E. Lurvey Treasurer and Secretary
Nancy Yuan Chief Financial Officer (China Operations)
</TABLE>
The experience and background of the Company's executive officers follows:
Mr. Roy Warren - President Since August, 1997; CEO Since May, 199
Mr. Warren currently serves as the President and Chief Executive
Officer of the Company and as a director. Mr. Warren has been in charge of
the day to day US operations of the Company and, along with Mr. Downes,
charted the course for the Company in its initial fund raising efforts. In
addition to his day to day operational duties, Mr. Warren continues to
develop strategy for the Company in growth and external financial matters.
For 15 years from 1981 through 1996, Mr. Warren enjoyed an active career in
the securities brokerage industry. During those years, Mr. Warren acted as
executive officer, principal, securities broker, and partner with brokerage
firms in Florida, most notably Kemper Financial Companies, Alex Brown & Sons
and Laffer Warren & Company. Mr. Warren currently serves on the Executive
Committee of the Company's Board of Directors.
Mr. Stephen Langley - Chief Operating Officer (China) Since October, 1999
Mr. Langley's entire 22 year career has been spent in agribusiness
sales, marketing, and management. Seventeen of those years have been with
multinational companies, including IBP Inc., a leading processor of fresh
beef and pork. While in middle management at IBP, the sales department under
his direct supervision accounted for annual sales of US $320 million and
sales volume of 1.25 million metric tons. In addition, Mr. Langley was
responsible for establishing a market presence for IBP in China. He opened
IBP's Shanghai Representative office in 1997 and sales of products imported
from IBP-US which amounted to US$ 250,000 in 1997, grew to over US $7
million in 1998. Mr. Langley developed the business strategy and directed
all sales activities in China for IBP, including negotiating pricing,
shipping, delivery, and other critical details of the supply of perishable
goods.
Mr. Langley and his family have lived in China continuously for the
last 6 years. He studied Chinese full time for two years from 1993-1995 and
achieved Chinese language Level 3 fluency (Foreign Service scale of 1-5,
with Level 5 equal to native speaker.)
Mr. Michael L. Davis, Chief Financial Officer - CFO Since October, 1997
Entering the securities industry over 35 years ago as a securities and
special situations analyst with ValueLine, Mr. Davis proceeded to serve as a
Tactical Planner, General Portfolio Manager and Short Sale Portfolio Manager
with a number of hedge funds. In 1972, he was a member of the Investment
Committee at Anchor Corp. which supervised its $2.5 billion family of funds,
as well as serving as Anchor's Chief Market Analyst. From 1978 through 1989,
Mr. Davis was the Portfolio Manager of Merrill Lynch's Special Value Fund.
In addition to his position with China Peregrine, Mr. Davis operates a
private consulting firm, M.L. Davis Financial Services, which advised
clients on stock selection and general market timing considerations,
research and writing of special reports on selected small and mid-cap growth
companies and in the supervision of an investment portfolio for a group of
United Arab Emirates investors. Mr. Davis has had 35 years of experience as
a securities analyst and portfolio manager for companies such as Value Line
and Merrill Lynch. Mr. Davis was appointed Chief Financial Officer of China
Peregrine in the summer of 1997.
Ms. Nancy Yuan, Chief Financial Officer (China) - COO (China) Since October,
1997
Ms. Yuan is a Shanghai native and is fluent in English, Mandarin, and
the Shanghai dialect, with a working knowledge of Cantonese. Ms. Yuan has a
Master of Science in Accounting from Kent State University with successful
completion of the USA CPA exam. She also has an engineering background with
an undergraduate degree in that field.
Ms. Yuan has nine years of cross- cultural working experience in
corporate accounting policy, procedure, control, and financial analysis with
knowledge of the accounting and auditing standards, US GAAP, and PRC
accounting and tax regulations. Ms. Yuan was trained at Coopers and Lybrand
in Hong Kong, where she was responsible for assessing corporate internal
control, corporate accounting policy and procedures, defining risk areas,
and auditing financial statements. She also was involved with the flotation
of a PRC company for listing in the HK Stock Exchange. In addition, Ms. Yuan
has been employed at Moen Incorporated, where she was responsible for
manufacturing quality, auditing and data analysis for Moen faucets. Ms. Yuan
also was an Assistant Professor at Qingdao University, where she taught
classes, established the Precision Measurement Lab, and conducted research
in the area of "Tolerance and Technical Measurements".
In addition to Mr. Warren, the current Directors of the Company are as
follows:
Mr. Arthur W. Blanding - Director Since November, 1999
Mr. Blanding is president of The Omega Company, international
technical consultants to the dairy industry. He has over 50 years experience
in management of dairy processing, sales and strategic planning consulting.
He graduated from Michigan State University in 1956, with a degree in food
science, and in 1964 from Oregon State University with a degree in Food
Microbiology, and attended Harvard Business School. As President of The
Omega Company, Mr. Blanding has completed over 200 projects successfully,
both in the U.S. and abroad. Clients of The Omega Company include Abbott
International, Cumberland Farms, Dairy Gold, Farm Fresh, Inc., Haagen Dazs,
Labatt, Ross Laboratories, and Stop & Shop Company, among others. Mr.
Blanding was a consultant for the design and construction of the dairy
processing facility built in Shanghai by Green Food Peregrine. Currently,
The Omega Company is a party to a consulting contract with China Peregrine
concerning technical and production issues for the Company's joint venture
milk processing facilities.
Mr. Robert J. Cummings - Director Since 1997
Mr. Cummings' work experience includes ten years in purchasing at Ford
Motor Company. In 1975, he founded and currently operates J & J Production
Service, Inc., a manufacturing representative business, which is currently
responsible for over $300 million in annual sales. Mr. Cummings currently
serves on the Executive Committee of the Company's Board of Directors.
Mr. Paul Downes - Director Since 1997
Mr. Downes currently is a director of the Company and, until his
resignation in April of 1998, served as Chairman of the Company. For nearly
10 years, Mr. Downes has managed a diverse portfolio of international
investments with concentration in the United Kingdom, Eastern Europe, North
Africa and Asia. In 1985, he founded a group of nursing homes for the
elderly in Great Britain which he sold in 1990. Prior to that time, Mr.
Downes, who holds the distinction of having won the title of English and
European Amateur Golf Champion, spent several years organizing golf
tournaments and international golf matches in Malaysia, Singapore, Thailand,
Philippines, Indonesia and Hong Kong, spending two years living in Southeast
Asia. Mr. Downes is one of the "founders" of the Company as it presently
exists and played a leading role in the Company's fund raising efforts.
Mr. George Holdsworth - Director Since 1997
Until May, 1998, Mr. Holdsworth was responsible for the operational
aspects of the Company's China operations. Mr. Holdsworth is a graduate of
the University of London with a B.S. in Mathematics and an Associate of the
London College of Music. He started in business as a manufacturing manager
in his father's company, Earlsdon Components, Ltd., where he became Director
of Operations, then owner and Managing Director. In 1993, Mr. Holdsworth
became owner of Earlsdon Technology, Ltd., a JV Partner of Shanghai Earlsdon
Valve Company, Ltd., and has lived in Shanghai for the last four years,
until May, 1998. Mr. Holdsworth sold his interest in Shanghai Earlsdon and
commenced his duties for the Company in March, 1997.
Michael G. Lucci - Director Since 1998
Mr. Lucci is a former All Pro linebacker who played for the Detroit
Lions of the National Football League from 1964 through his retirement from
professional football in 1973. Mr. Lucci became associated with Bally's
Total Fitness Corporation in 1971 and rose through the ranks to become that
corporation's Vice President of club operations in the mid-west, Senior
Vice-President, and President and Chief Operating Officer in 1993. Mr. Lucci
retired in 1996 and, since that time, has managed a diverse investment
portfolio for himself. Along with Messrs. Warren and Cummings, Mr. Lucci
serves on the Executive Committee of the Company's Board of Directors.
Mr. John McCormack - Director Since 1997
Mr. McCormack currently is a director of the Company, having filled
the directorship vacated by Mr. Dale Reese in the Summer of 1997. For over
15 years, Mr. McCormack has served as an executive with Dean Foods Co., the
nation's leading processor and distributor of a full line of branded and
private label products, including fluid milk, cottage cheese and ice cream.
Dean Foods is also considered a leader in the frozen vegetable business with
brands which include BirdsEye, Freshlike and Veg-All. Prior to a recent move
to the Chicago area for Dean Foods, Mr. McCormack managed McArthur Dairy in
Miami, Florida, a wholly- owned subsidiary of Dean Foods Co., and South
Florida's leading dairy processor and distributor. Currently, as a Vice
President of Dean Foods, he is in charge of Dean Food's mid-western division
out of Chicago, Illinois. Mr. McCormack serves on the Compensation Committee
of the Company's Board of Directors.
Mr. Phillip Pearce - Director Since 1997
Mr. Pearce is a "retired" member of the securities industry. Mr.
Pearce served as Chairman of the NASD during which time he was instrumental
in the founding of NASDAQ. Additionally, Mr. Pearce was a former Director of
E.F. Hutton and has served as Governor of the New York Stock Exchange. Since
his retirement in 1988, Mr. Pearce has remained active in the securities
industry as a corporate financial consultant. Mr. Pearce serves on the
Compensation Committee of the Company's Board of Directors.
Identification of Significant Employees Other Than Above : None
- --------------------------------------------------------
Family Relationships: None
- --------------------
Involvement in Certain Legal Proceedings: None
- ----------------------------------------
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING REQUIREMENTS
As required under the securities laws of the United States, the
Company's directors, its executive (and certain other) officers, and any
persons holding ten percent or more of the Common Shares must report on
their ownership of the Common Shares and any changes in that ownership to
the Securities and Exchange Commission and to the NASD Automated Quotation
System. Specific due dates for these reports have been established. On
February 14, 2000, American Flavors China, Inc., Charles Beech, Arthur
Blanding, Robert Cummings, Michael Davis, Paul Downes, Michael Lucci, Susan
Lurvey, John McCormack, Phillip Pearse, Dale Reese and Roy Warren each filed
a Form 5 which contained initial reporting information attributable to Form
3 for the January 6, 1999 effective date of the Company's November 6, 1998
Form 10SB filing. During the year ended December 31, 1998, the Company did
not have a class of securities registered pursuant to Section 12 of the
Securities Exchange Act of 1934. Accordingly, no securities transaction
reports were filed or received by the Company during that period, or which
relate to such period.
ITEM 10 - EXECUTIVE COMPENSATION
Summary Compensation Table
- --------------------------
The following table sets forth the compensation paid by the Company
during the fiscal years ended December 31, 1997, 1998 and 1999 , as
designated in brackets, to the Company's Chief Executive Officer, and the
four other most highly compensated executive officers whose total 1999
salary and bonus exceeded $100,000 (collectively, the "Named Executive
Officers"):
<TABLE>
<CAPTION>
------Annual Compensation------ ---Long-Term Compensation--
Name & Position Salary Bonus Total Other Options(1)
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Roy G. Warren $120,000 $120,000 410,914
President
[8/15/97 to date]
Chief Executive Officer
[3/99 to present]
Steven Langley $ 75,000 $30,000 $105,000 $70,000(2) 200,000(3)
Chief Operating
Officer (China)
[9/99 to date]
Nancy Yuan $ 40,000 $ 5,000 $ 45,000 5,000(4)
Chief Financial
Officer (China)
[9/99 to date]
Charles Beech 510,914
Chairman [4/20/97 to 6/1/97
and 4/30/98 to 11/5/99]
Chief Executive Officer
[4/20/97 to 3/99]
Paul Downes (5) 1,383,705
Chairman [8/15/97 to 4/30/98]
<FN>
<F1> (1) Unless otherwise noted, the Options listed above were authorized
by a Directors' resolution on April 20, 1997. At that time, a
market did not exist for the Company's unrestricted shares, which
had a par value of $0.001.
<F2> (2) Includes $48,000 annual allowance for housing in Shanghai, PRC
for Mr. Langley and his family and $22,000 educational expense
for family members.
<F3> (3) Pursuant to October 1, 1999 agreement for five year options (from
vesting) at market as of September 1, 1999, subject to the
following vesting schedule: 50,000 at 9-1-99; 50,000 at 9-1-00;
50,000 at 9-1-01; 50,000 at 9-1-02.
<F4> (4) Pursuant to October 1, 1999 agreement for five year options at
$1.00 per share.
<F5> (5) These options were granted to Tamarind Management, Ltd., an
affiliate of Mr. Downes.
</FN>
</TABLE>
Option Grant Table 1999
- -----------------------
<TABLE>
<CAPTION>
Securities
Underlying Percentage Per Share Expiration
Name & Position Options of Total Exercise $ Date
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Stephen Langley 200,000 88.88% market at 5 years from
Chief Operating 12-1-99 ($1.10) vesting
Officer (China)
[9/99 to date]
Nancy Yuan 25,000 11.12% market at 9-12-04
Chief Financial 12-1-99 ($1.10)
Officer (China)
[9/99 to date
</TABLE>
Aggregated Option Exercises in Fiscal 1998 and 1999
- ---------------------------------------------------
None of the Named Executive Officers exercised any stock options
during fiscal 1998 or 1999. The following table provides information on the
value of such officers' unexercised options at December 31, 1998 and 1999.
Aggregated 1999 Fiscal Year End Option Value Table
- --------------------------------------------------
<TABLE>
<CAPTION>
Securities Underlying Value of "In The Money"
Name & Position Unexercised Options Unexercised Options
- --------------- --------------------- -----------------------
<S> <C> <C>
Roy G. Warren 410,914 $-0-
Stephen Langley 50,000 (150,000 unexercisable) $-0-
Nancy Yuan 25,000 $-0-
Charles Beech 510,914 $-0-
Paul Downes (2) 1,383,705 $-0-
<FN>
<F1> (1) On December 31, 1999, the Company's unrestricted common stock was
quoted on the NASD Over The Counter Electronic Bulletin Board at
a closing price of $0.81; the reported dollar values represent
the "in-the money" value of the options listed as of each year
end.
<F2> (2) These options were granted to Tamarind Management, Ltd., an
affiliate of Mr. Downes.
</FN>
</TABLE>
Compensation of Directors
- -------------------------
Directors were compensated for their travel expenses to and from Board
of Directors' meetings in 1998 and 1999. There were 4 in person meetings and
11 telephonic meetings of the Board in 1998 and 2 in person meetings and 11
telephonic meetings of the Board in 1999.
Employment Contracts
- --------------------
There are employment contracts between the Company and Stephen
Langley, the Chief Operating Officer for the Company's Chinese operations
and Nancy Yuan, the Chief Financial Officer for the Company's Chinese
operations. These contracts are dated December 1, 1999 and reflect effective
dates of September 1, 1999 and September 13, 1999, respectively. Both Mr.
Langley and Ms. Yuan reside in The Shanghai PRC metropolitan area.
Mr. Langley has a five year contract at a base annual salary of
$75,000, with a quarterly bonus of $7,500 in the first year. In subsequent
years, Mr. Langley's bonus is performance based. In addition, Mr. Langley
receives a $48,000 annual housing allowance and a $22,000 education
allowance for his family. Mr. Langley's employment agreement calls for his
receipt of five year stock options for 200,000 shares at an exercise price
of $1.12 per share. These options are in four equal traunches of 50,000 with
vesting over a three year period. The Company anticipates that Mr. Langley's
option agreement will be finalized and executed in the second quarter of
2000.
Ms. Yuan has a five year contract at a base annual salary of $40,000,
with an annual bonus of $5,000 in the first year. Ms. Yuan's employment
agreement calls for her receipt of one time five year stock options for
25,000 shares at an exercise price of $1.12 per share.. The Company
anticipates that Ms. Yuan's option agreement will be finalized and executed
in the second quarter of 2000.
ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth as of March 29, 2000, certain
information with respect to the beneficial ownership of the Common Stock of
the Company on an as-converted basis for the Series A and B Preferred Stock
of the Company as to (a) each person known by the Company to own
beneficially more than 5% of the outstanding shares of Common Stock, (b)
each director of the Company, (c) each Named Executive Officer, and (d) all
directors and officers of the Company as a group. Except as otherwise noted,
the named beneficial owner has sole voting and investment power with respect
to the shares shown.
(a) 5% Ownership
<TABLE>
<CAPTION>
Name & Address of (2) Amount & Nature of Percent of
Title of Class (1) Beneficial owner Beneficial Owner Class
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common Mr. Dale Reese 2,457,985 20.52%
125 Kingston Road
Media, PA
Common American Flavors China, Inc. 1,531,685 12.79%
1007 Chestnut Street
Newton, MA 02164
Common Tamarind Management., Ltd. 738,622 6.17%
(Paul Downes)
31 Broad Street
P.O. Box 23
St. Helier Channel Islands
<FN>
<F1> (1) While listed as "common," the class of stock includes the shares
of common stock underlying Series A and B convertible preferred
stock issued by the Company.
<F2> (2) Insofar as Mr. Paul Downes has investment power with respect to
Tamarind Management, Ltd., the Company's securities held by Mr.
Downes and Tamarind are combined in this table.
</FN>
<CAPTION>
(b) Directors
Name & Address of Amount & Nature of Percent of
Title of Class Beneficial owner Beneficial Owner(1) Class
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common Mr. Paul Downes 738,622 6.17%
5646 Windrift Lane
Boca Raton, FL 33433
Common Roy G. Warren 209,500 1.75%
1128 Country Club Road
N. Palm Beach, FL 33408
Common Robert Cummings 310,000 2.59%
2829 N.E. 44th Street
Lighthouse Point, FL 33064
Common Michael G. Lucci 210,000 1.75%
49 Spanish River Drive
Ocean Ridge, FL 33435
Common John McCormack 100,000 0.83%
8750 South Grant
Burridge, IL 60521
Common Mr. Arthur W. Blanding 47,426 0.40%
Janesville, WI 53545
Common Phillip Pearce 25,000 0.21%
6624 Glenleaf Court
Charlotte, NC 28270
<CAPTION>
(c) Executive Officers
Name & Address of Amount & Nature of Percent of
Title of Class Beneficial owner Beneficial Owner(1) Class
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common Roy G. Warren 209,500 1.75%
(President/CEO/Director)
1128 Country Club Road
N. Palm Beach, FL 33408
Common Michael L. Davis 25,000 0.21%
(CFO)
20 Harris Avenue
Hamptom Beach, NH 03843
Common Stephen Langley 20,000 0.16%
(COO - China)
102 Greenwich Drive
Four Seasons Garden
983 Hua Mu Road
Pudong, Shanghai 201204
China
Common Susan Lurvey 12,000 0.10%
(Treasurer/Secretary)
6340 Fox Run Circle
Jupiter, FL 33458
<CAPTION>
(d) The following includes all who serve as directors or executive
officers
Name & Address of Amount & Nature of Percent of
Title of Class Beneficial owner Beneficial Owner(1) Class
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common Mr. Paul Downes 738,622 6.17%
(Director)
5646 Windrift Lane
Boca Raton, FL 33433
Common Roy G. Warren 209,500 1.75%
(President/Director)
1128 Country Club Road
N. Palm Beach, FL 33408
Common Robert Cummings 310,000 2.59%
(Director)
2829 N.E. 44th Street
Lighthouse Point, FL 33064
Common Michael G. Lucci 210,000 1.75%
(Director)
49 Spanish River Drive
Ocean Ridge, FL 33435
Common John McCormack 100,000 0.83%
(Director)
8750 South Grant
Burridge, IL 60521
Common Mr. Arthur W. Blanding 47,426 0.40%
(Director)
425 Apache Drive
Janesville, WI 53545
Common Phillip Pearce 25,000 0.21%
(Director)
6624 Glenleaf Court
Charlotte, NC 28270
Common Michael L. Davis 25,000 0.21%
(CFO)
20 Harris Avenue
Hamptom Beach, NH 03843
Common Stephen Langley 20,000 0.16%
(COO - China)
102 Greenwich Drive
Four Seasons Garden
983 Hua Mu Road
Pudong, Shanghai 201204
China
Common Susan Lurvey 12,000 0.10%
(Treasurer/Secretary)
6340 Fox Run Circle
Jupiter, FL 33458
Common All current directors and 1,697,548 13.9%
executive officers as a group
</TABLE>
The following is a breakdown, by beneficial owner and title of class,
of the common stock issued and common stock underlying options and Series A
and B convertible preferred stock which the respective holders have the
right to acquire within sixty (60) days:
<TABLE>
<CAPTION>
Holder Type of Security Common Stock (Issued
or Capable of Being Acquired)
- -------------------------------------------------------------------------------------
<S> <C> <C>
Mr. Dale Reese Common 840,544
Series A Convertible Pref. 500,000
Series B Convertible Pref. 1,017,441
Options 700,000
Tamarind Common 687,000
Management, Ltd. Series B Convertible Pref. 107,440
(c/o Mr. Paul Downes) Options 1,383,705
Mr. Paul Downes Common 24,182
(Individually)
Peregrine
Enterprises, Inc. Common 360,000
(c/o Mr. C. Beech)
Mr. Charles Beech Common 200,000
(Individually) Options 510,914
Roy G. Warren Common 209,500
Options 410,914
Robert Cummings Common 310,000
Michael G. Lucci Common 210,000
John McCormack Common 100,000
Phillip Pearce Common 25,000
Michael L. Davis Options 25,000
Steve Langley Common 20,000
Options 50,000(1)
Susan Lurvey Common 12,000
Nancy Yuan Options 25,000(1)
<FN>
<F1> (1) See item (e) below.
</FN>
</TABLE>
(e) There currently are no arrangements that may result in a change of
ownership or control of the Company, other than Mr. Langley's Ms. Yuan's
employment agreements with respect to the imminent issuance of options
immediately exercisable for 50,000 and 25,000 shares of common stock,
respectively.
ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Loans/Fees
- ----------
During the organization period of Green Food Peregrine, China National Green
Food Corporation, one of the three partners of Green Food Peregrine, wired
RMB6,600,000 in the form of shareholder's loan to Green Food Peregrine to
finance its activities. In April, 1996, China National Green Food
Corporation wired another RMB2,000,000 in the form of shareholder's loan to
GFP. All these shareholder's loans have been converted to paid-in capital to
satisfy the registered capital requirements contained in the Article of
Association of Green Food Peregrine. To date, a total of interest payable of
RMB882,721 has been converted to paid-in capital as the registered capital
of China National Green Food Corporation.
In April and November, 1996, China National Green Food loaned an additional
RMB350,000 and RMB200,000, respectively, to Green Food Peregrine to finance
working capital. An interest rate of 12.4% per annum was applied to these
loans. Both of these loans were paid in full in September and October, 1997,
respectively.
In 1996, Amer-China, one of three partners of Green Food Peregrine, provided
Green Food Peregrine with consulting services, such as English translation
and negotiation supporting services in the U.S., and charged a total of
$36,000 to Green Food Peregrine. The charge was accounted for consulting
expense in Green Food Peregrine's books.
In February, 1997 the Company issued 25,000 shares of common stock in
exchange for 100% of equity interest of Manor Products Corp. (Manor). Manor
was a Delaware company established on January 10, 1996. In early 1996, 80%
of equity interest of Manor was bought by the principal of the initial
founding entity of the Company. Accordingly, this acquisition was regarded
as a related party transaction.
In January, 1997, the major limited partner of China Peregrine Enterprises
loaned US $200,000 to that limited partnership in order for China Peregrine
Enterprises to meet interim registered capital requirements of the Green
Food Peregrine Articles of Association and joint venture contract. In March,
1997, three shareholders of the Company together provided a loan of US
$1,315,000 to pay China Peregrine Enterprises' final registered capital
requirement to Green Food Peregrine. This last capital contribution was set
by the Board of Directors of Green Food Peregrine as a condition precedent
to the approval of the Company's acquisition of the interest of China
Peregrine Enterprises in and to the Green Food Peregrine joint venture.
These two loans were paid off during May and June, 1997, utilizing the
proceeds from a Rule 504 regulation D offering by the Company.
In March, 1997, a holder of the majority of the partnership interests in
China Peregrine Enterprises (and a major stockholder in the Company),
together with two other investors in the Company, assumed a US $1,260,000
outstanding line of credit owed by the limited partnership to a Tennessee-
based financial institution. On March 15, 1997, the Company issued 1,260,000
shares of its Series B preferred stock to these shareholders in
consideration for this assumption. The line of credit was paid in full in
October, 1997.
In the course of setting up the Hangzhou Meilijian joint venture, HDC
contributed fixed assets with a value in excess of its required capital
contribution amount. Based on an agreement signed by the Chinese and
American investors, the excess portion was treated as a fixed asset loan
from HDC at an interest 8% per annum. The balance of this loan at December
31, 1998 was $560,080.
On January 1, 1994, HDC provided the Company with the use of its trademark,
which was valued at RMB500,000 (approximately US$60,245). The Company
recorded this trademark value as a part of deferred assets and a shareholder
loan. The Company recorded amortization of RMB50,000 (approximately
US$6,025) per year for trademark and paid cash of RMB50,000 to HDC per year
against the shareholder loan. The balance of this loan at December 31, 1998
was $36,238. Accumulated interest on these loans amounted to $81,265.
Relationships
- -------------
Mr. Paul Downes has investment power with respect to the affairs of Tamarind
Management, Ltd. Accordingly, the Company's securities held by Mr. Downes
and Tamarind have been combined in this document for reporting purposes. The
Downes/Tamarind ownership of issued and underlying shares of common stock,
Series B Preferred Stock and Options represents 15.87% of all issued and
outstanding common stock and shares of common stock underlying the Series A
and B Preferred plus unexercised options and warrants.
Similarly, insofar as Mr. Charles Beech has investment power with respect to
the affairs of Peregrine Enterprises, Inc. The Company's securities held by
Mr. Beech and Peregrine Enterprises likewise have been combined in this
document for reporting purposes.
The Company purchased the assets of China Peregrine Enterprises, Limited
(China Peregrine Enterprises) in March of 1997, in exchange for 1,040,000
shares of the common stock of the Company. At the time of this asset
purchase, Mr. Dale Reese was the major equity holder in the China Peregrine
Enterprises limited partnership and Mr. Charles Beech "controlled" the
activities of China Peregrine Enterprises by virtue of his control of China
Peregrine International, Inc., the General Partner of China Peregrine
Enterprises. At the time of the asset purchase, Messrs. Reese and Beech were
two of the three directors of the Company. As noted above, through the
assumption of a loan in excess of one million dollars owed by China
Peregrine Enterprises to a Tennessee bank, and by virtue of his position as
a founder of the Company, and through stock purchases, Mr. Reese presently
holds a 20.52% interest in the equity of the Company.
ITEM 13 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTOIN>
SEC
Exhibit Reference
No. No. Title of Document
- ------- --------- -----------------
<S> <C> <C>
1a 2 Asset Purchase Agreement (1)
China Peregrine Enterprises, Limited
1b 2 Interim Agreement to Operate (1)
China Peregrine Project
2a 3(i) Articles of Incorporation (1)
2b 3(i) Amended Articles (name change) (1)
3 3(ii) Restated Bylaws (1)
China Peregrine Food Corporation
4a 4 Rights of Equity Holders (1)
Common B Articles of Incorporation
4b 4 Preferred, Series A and B Designation (1)
4c 4 Preferred, Series C Designation (1)
4d 4 Preferred, Series D Designation (2)
4e 4 Preferred, Series D Amended *
4f 4 Preferred, Series E Designation (3)
4g 4 Preferred, Series F Designation *
5 10 Material Contracts (1)
Green Food Joint Venture Contract
6 10 Material Contracts (1)
Hangzhou Meilijian Joint
Venture Contract
7a 10 Material Contracts (1)
Asset Purchase Agreement
American Flavors China, Inc.
7b 10 First Amendment (1-28-98) (1)
7c 10 Second Amendment (6-19-98) (1)
8 21 Subsidiaries (1)
Articles of Association
Green Food Peregrine
9 21 Subsidiaries (1)
Articles of Association
Hangzhou Meilijian
10 27 Financial Data Schedules, 12-31-99 *
11 99 Hangzhou Meilijian Audited Financial *
Statements, Years Ending
December 31,1998 and 1999
12 99 Green Food Peregrine Audited Financial *
Statements, Year Ending
December 31,1998
<FN>
* Filed herewith.
(1) Filed with Form 10SB/A First Amendment
(2) Filed with Form 10QSB for 3-31-99
(3) Filed with Form 10QSB for 6-30-99
</FN>
</TABLE>
(b) Reports on Form 8-k During the Last Quarter of 1999: None
---------------------------------------------------
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, China Premium Food Corporation has caused this report to be signed
on its behalf by the undersigned, thereunder duly authorized.
CHINA PREMIUM FOOD CORPORATION
(Formerly China Peregrine Food Corporation)
By: /S/ Roy G. Warren, President
In accordance with the Securities Exchange Act of 1934, China Peregrine Food
Corporation has caused this report to be signed on its behalf by the
undersigned in the capacities and on the dates stated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/S/ Roy G. Warren Chief Executive Officer April 13, 2000
and Director
/S/ Michael L. Davis Chief Financial Officer April 13, 2000
/S/ Susan Lurvey Secretary, Treasurer April 13, 2000
</TABLE>
Exhibit 4(e)
AMENDED CERTIFICATE TO SET FORTH DESIGNATIONS, VOTING POWERS,
PREFERENCES, LIMITATIONS, RESTRICTIONS, AND RELATIVE
RIGHTS OF SERIES D 6% CUMULATIVE CONVERTIBLE
PREFERRED STOCK, $.001 PAR VALUE PER SHARE
It is hereby certified that:
I. The name of the corporation is China Peregrine Food Corporation
(the "Corporation"), a Delaware corporation.
II. Set forth hereinafter is a statement of the voting powers,
preferences, limitations, restrictions, and relative rights of shares of
Series D 6% Cumulative Convertible Preferred Stock hereinafter designated as
contained in a resolution of the Board of Directors of the Corporation
pursuant to a provision of the Articles of Incorporation of the Corporation
permitting the issuance of said Series D 6% Cumulative Convertible Preferred
Stock by resolution of the Board of Directors:
Series D 6% Cumulative Convertible Preferred Stock, $.001 par value.
1. Designation: Number of Shares. The designation of said series of
Preferred Stock shall be Series D 6% Cumulative Convertible Preferred Stock
(the "Series D Preferred Stock"). The number of shares of Series D Preferred
Stock shall be 165,000. Each share of Series D Preferred Stock shall have a
stated value equal to $10 (as adjusted for any stock dividends, combinations
or splits with respect to such shares) (the "Stated Value"), and a par value
of $0.001 per Series D Preferred Share.
2. Dividends.
---------
(a) The Holders of outstanding shares of Series D Preferred Stock
shall be entitled to receive preferential dividends in cash out of any funds
of the Corporation legally available at the time for declaration of
dividends before any dividend or other distribution will be paid or declared
and set apart for payment on any shares of any Common Stock, Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, or
other class of stock presently authorized or to be authorized (the Common
Stock, Series A Preferred Stock, Series B Preferred Stock, Series C
Preferred Stock, and such other stock being hereinafter collectively the
"Junior Stock") at the rate of 6% simple interest per annum on the Stated
Value per share payable quarterly commencing with the quarter ending June
30, 1999 when as and if declared; provided however that dividend payments
will be made in additional fully paid and non assessable shares of Series D
Preferred Stock at a rate of one share of Series D Preferred Stock for each
$10 of such dividend not paid in cash, and the issuance of such additional
shares shall constitute full payment of such dividend. Dividends may be paid
at the Company's option with Series D Preferred Stock only if the Common
Stock deliverable upon conversion of such Series D Preferred Stock will have
been included for public resale in an effective registration statement filed
with the Securities and Exchange Commission on the dates such dividends are
payable and paid to the Holder, otherwise the dividend will be paid in cash.
(b) The dividends on the Series D Preferred Stock at the rates
provided above shall be cumulative whether or not earned so that if at any
time full cumulative dividends at the rate aforesaid on all shares of the
Series D Preferred Stock then outstanding from the date from and after which
dividends thereon are cumulative to the end of the quarterly dividend period
next preceding such time shall not have been paid or declared and set apart
for payment, or if the full dividend on all such outstanding Series D
Preferred Stock for the then current dividend period shall not have been
paid or declared and set apart for payment, the amount of the deficiency
shall be paid or declared and set apart for payment (but without interest
thereon) before any sum shall be set apart for or applied by the Corporation
or a subsidiary of the Corporation to the purchase, redemption or other
acquisition of the Series D Preferred Stock or any shares of any other class
of stock ranking on a parity with the Series D Preferred Stock ("Parity
Stock") and before any dividend or other distribution shall be paid or
declared and set apart for payment on any Junior Stock and before any sum
shall be set aside for or applied to the purchase, redemption or other
acquisition of Junior Stock.
(c) Dividends on all shares of the Series D Preferred Stock shall
begin to accrue and be cumulative from and after the date of issuance
thereof. A dividend period shall be deemed to commence on the day following
a quarterly dividend payment date herein specified and to end on the next
succeeding quarterly dividend payment date herein specified.
3. Liquidation Rights.
------------------
(a) Upon the dissolution, liquidation or winding-up of the
Corporation, whether voluntary or involuntary, the Holders of the Series D
Preferred Stock shall be entitled to receive before any payment or
distribution shall be made on the Junior Stock (specifically including,
without limitation, Series A Preferred Stock, Series B Preferred Stock, and
Series C Preferred Stock, out of the assets of the Corporation available for
distribution to stockholders, the Stated Value per share of Series D
Preferred Stock and all accrued and unpaid dividends to and including the
date of payment thereof. Upon the payment in full of all amounts due to
Holders of the Series D Preferred Stock the Holders of the Common Stock of
the Corporation and any other class of Junior Stock shall receive all
remaining assets of the Corporation legally available for distribution. If
the assets of the Corporation available for distribution to the Holders of
the Series D Preferred Stock shall be insufficient to permit payment in full
of the amounts payable as aforesaid to the Holders of Series D Preferred
Stock upon such liquidation, dissolution or winding-up, whether voluntary or
involuntary, then all such assets of the Corporation shall be distributed to
the exclusion of the Holders of shares of Junior Stock ratably among the
Holders of the Series D Preferred Stock.
(b) Neither the purchase nor the redemption by the Corporation of
shares of any class of stock nor the merger or consolidation of the
Corporation with or into any other corporation or corporations nor the sale
or transfer by the Corporation of all or any part of its assets shall be
deemed to be a liquidation, dissolution or winding-up of the Corporation for
the purposes of this paragraph 3.
4. Conversion into Common Stock. Shares of Series D Preferred Stock
shall have the following conversion rights and obligations:
(a) Subject to the further provisions of this paragraph 4 each
Holder of shares of Series D Preferred Stock shall have the right at any
time commencing on the earlier of 91 days after the filing of this
Certificate of Designation with the Office of the Secretary of State of
Delaware, or the effective date of a registration statement described in
Section 10.1(iv) of the Subscription Agreement entered into by the
Corporation and Holder (or Holder's predecessor) relating to the Series D
Preferred Stock ("Subscription Agreement"), to convert such shares into
fully paid and non-assessable shares of Common Stock of the Corporation (as
defined in paragraph 4(i) below) determined in accordance with the
Conversion Price provided in paragraph 4(b) below (the "Conversion Price");
provided, that the aggregate Stated Value to be converted shall be at least
$10,000 (unless if at the time of such conversion the aggregate Stated Value
of all shares of Series D Preferred Stock registered to the Holder is less
than $10,000, then the whole amount may be converted). All issued or accrued
but unpaid dividends may be converted at the election of the Holder
simultaneously with the conversion of principal amount of Stated Value of
Series D Preferred Stock being converted.
(b) The number of shares of Common Stock issuable upon conversion
of each share of Series D Preferred Stock shall equal (i) the sum of (A) the
Stated Value per share and (B) at the Holder's election accrued and unpaid
dividends on such share, divided by (ii) the Conversion Price. The
Conversion Price shall be equal to the lesser of: (i) 100% of the average of
the Closing Bid Price of the Corporation's Common Stock for the trading day
immediately preceding the date of issuance of the shares of Series D
Preferred Stock to the Holders; or (ii) at 80% of the average of the three
lowest Closing Bid Prices for the 22 trading days immediately preceding the
conversion of the respective shares of Series D Preferred Stock (Lookback
Period"). The Closing Bid Price shall mean the closing bid price of the
Corporation's Common Stock as reported by the NASD OTC Bulletin Board or the
principal exchange or market where traded.
(c) The Holder of any certificate for shares of Series D Preferred
Stock desiring to convert any of such shares may give notice of its decision
to convert the shares into common stock by delivering or telecopying an
executed and completed notice of conversion to the Corporation and the
Corporation's Transfer Agent and delivering within three business days
thereafter, the original notice of conversion and the certificate for the
Preferred Stock properly endorsed for or accompanied by duly executed
instruments of transfer (and such other transfer papers as said Transfer
Agent may reasonably require) to the Corporation or the Corporation's
Transfer Agent. Each date on which a notice of conversion is delivered or
telecopied to the Corporation or the Corporation's Transfer Agent in
accordance with the provisions hereof shall be deemed a Conversion Date. A
form of Notice of Conversion that may be employed by a Holder is annexed
hereto as Exhibit A. The Corporation will transmit the certificates
representing the shares of common stock issuable upon conversion of any
Series D Preferred Stock (together with the Series D Preferred Stock
representing the shares not converted) to the Holder via express courier, by
electronic transfer or otherwise, within three business days after receipt
by the Corporation of the original notice of conversion and the Series D
Preferred Stock representing the shares to be converted ("Delivery Date").
The Holder of the shares so surrendered for conversion shall be entitled to
receive on or before the Delivery Date a certificate or certificates which
shall be expressed to be fully paid and non-assessable for the number of
shares of Common Stock to which such Holder shall be entitled upon such
conversion registered in the name of such Holder. The Corporation is
obligated to deliver to the Holder simultaneously with the aforedescribed
Common Stock, at the election of the Holder, additional Common Stock
representing the conversion at the Conversion Price, of dividends accrued on
the Series D Preferred Stock being converted. In the case of any Series D
Preferred Stock which is converted in part only the Holder of shares of
Series D Preferred Stock shall upon delivery of the certificate or
certificates representing Common Stock also receive a new share certificate
representing the unconverted portion of the shares of Series D Preferred
Stock. Nothing herein shall be construed to give any Holder of shares of
Series D Preferred Stock surrendering the same for conversion the right to
receive any additional shares of Common Stock or other property which
results from an adjustment in conversion rights under the provisions of
paragraph (d) or (e) of this paragraph 4 until Holders of Common Stock are
entitled to receive the shares or other property giving rise to the
adjustment.
In the case of the exercise of the conversion rights set forth in
paragraph 4(a) the conversion privilege shall be deemed to have been
exercised and the shares of Common Stock issuable upon such conversion shall
be deemed to have been issued upon the date of receipt by the Corporation or
Transfer Agent of the Notice of Conversion. The person or entity entitled to
receive Common Stock issuable upon such conversion shall, on the date such
conversion privilege is deemed to have been exercised and thereafter, be
treated for all purposes as the record Holder of such Common Stock and shall
on the same date cease to be treated for any purpose as the record Holder of
such shares of Series D Preferred Stock so converted.
Upon the conversion of any shares of Series D Preferred Stock no
adjustment or payment shall be made with respect to such converted shares on
account of any dividend on the Common Stock, except that the Holder of such
converted shares shall be entitled to be paid any dividends declared on
shares of Common Stock after conversion thereof.
The Corporation shall not be required, in connection with any
conversion of Series D Preferred Stock, and payment of dividends on Series D
Preferred Stock to issue a fraction of a share of its Series D Preferred
Stock and shall instead deliver a stock certificate representing the next
whole number.
The Corporation and Holder may not convert that amount of the Series D
Preferred Stock on a Conversion Date in connection with that number of
shares of Common Stock which would be in excess of the sum of (i) the number
of shares of Common Stock beneficially owned by the Subscriber and its
affiliates on such Conversion Date, and (ii) the number of shares of Common
Stock issuable upon the conversion of the Series D Preferred Stock with
respect to which the determination of this proviso is being made on such
Conversion Date, which would result in beneficial ownership by the Holder
and its affiliates of more than 9.99% of the outstanding shares of Common
Stock of the Corporation. For the purposes of the proviso to the immediately
preceding sentence, beneficial ownership shall be determined in accordance
with Section 13(d) of the Securities Exchange Act of 1934, as amended, and
Regulation 13d-3 thereunder.
(d) The Conversion Price shall be subject to adjustment from time
to time as follows:
(i) In case the Corporation shall at any time (A) declare any
dividend or distribution on its Common Stock or other securities of
the Corporation other than the Series D Preferred Stock, (B) split or
subdivide the outstanding Common Stock, (C) combine the outstanding
Common Stock into a smaller number of shares, or (D) issue by
reclassification of its Common Stock any shares or other securities of
the Corporation, then in each such event the Conversion Price shall be
adjusted proportionately so that the Holders of Series D Preferred
Stock shall be entitled to receive the kind and number of shares or
other securities of the Corporation which such Holders would have
owned or have been entitled to receive after the happening of any of
the events described above had such shares of Series D Preferred Stock
been converted immediately prior to the happening of such event (or
any record date with respect thereto). Such adjustment shall be made
whenever any of the events listed above shall occur. An adjustment
made to the Conversion pursuant to this paragraph 4(d)(i) shall become
effective immediately after the effective date of the event
retroactive to the record date, if any, for the event.
(e) (i) In case of any merger of the Corporation with or into any
other corporation (other than a merger in which the Corporation is the
surviving or continuing corporation and which does not result in any
reclassification, conversion, or change of the outstanding shares of Common
Stock) then unless the right to convert shares of Series D Preferred Stock
shall have terminated, as part of such merger lawful provision shall be made
so that Holders of Series D Preferred Stock shall thereafter have the right
to convert each share of Series D Preferred Stock into the kind and amount
of shares of stock and/or other securities or property receivable upon such
merger by a Holder of the number of shares of Common Stock into which such
shares of Series D Preferred Stock might have been converted immediately
prior to such consolidation or merger. Such provision shall also provide for
adjustments which shall be as nearly equivalent as may be practicable to the
adjustments provided for in paragraph (d) of this paragraph 4. The foregoing
provisions of this paragraph 4(e) shall similarly apply to successive
mergers.
(ii) In case of any sale or conveyance to another person or
entity of the property of the Corporation as an entirety, or
substantially as an entirety, in connection with which shares or other
securities or cash or other property shall be issuable, distributable,
payable, or deliverable for outstanding shares of Common Stock, then,
unless the right to convert such shares shall have terminated, lawful
provision shall be made so that the Holders of Series D Preferred
Stock shall thereafter have the right to convert each share of the
Series D Preferred Stock into the kind and amount of shares of stock
or other securities or property that shall be issuable, distributable,
payable, or deliverable upon such sale or conveyance with respect to
each share of Common Stock immediately prior to such conveyance.
(f) Whenever the number of shares to be issued upon conversion of
the Series D Preferred Stock is required to be adjusted as provided in this
paragraph 4, the Corporation shall forthwith compute the adjusted number of
shares to be so issued and prepare a certificate setting forth such adjusted
conversion amount and the facts upon which such adjustment is based, and
such certificate shall forthwith be filed with the Transfer Agent for the
Series D Preferred Stock and the Common Stock; and the Corporation shall
mail to each Holder of record of Series D Preferred Stock notice of such
adjusted conversion price.
(g) In case at any time the Corporation shall propose:
(i) to pay any dividend or distribution payable in shares
upon its Common Stock or make any distribution (other than cash
dividends) to the Holders of its Common Stock; or
(ii) to offer for subscription to the Holders of its Common
Stock any additional shares of any class or any other rights; or
(iii) any capital reorganization or reclassification of its
shares or the merger of the Corporation with another corporation
(other than a merger in which the Corporation is the surviving or
continuing corporation and which does not result in any
reclassification, conversion, or change of the outstanding shares of
Common Stock); or
(iv) the voluntary dissolution, liquidation or winding-up of
the Corporation;
then, and in any one or more of said cases, the Corporation shall cause at
least fifteen (15) days prior notice of the date on which (A) the books of
the Corporation shall close or a record be taken for such stock dividend,
distribution, or subscription rights, or (B) such capital reorganization,
reclassification, merger, dissolution, liquidation or winding-up shall take
place, as the case may be, to be mailed to the Transfer Agent for the Series
D Preferred Stock and for the Common Stock and to the Holders of record of
the Series D Preferred Stock.
(h) So long as any shares of Series D Preferred Stock shall remain
outstanding and the Holders thereof shall have the right to convert the same
in accordance with provisions of this paragraph 4 the Corporation shall at
all times reserve from the authorized and unissued shares of its Common
Stock a sufficient number of shares to provide for such conversions.
(i) The term Common Stock as used in this paragraph 4 shall mean
the $.001 par value Common Stock of the Corporation as such stock is
constituted at the date of issuance thereof or as it may from time to time
be changed or shares of stock of any class of other securities and/or
property into which the shares of Series D Preferred Stock shall at any time
become convertible pursuant to the provisions of this paragraph 4.
(j) The Corporation shall pay the amount of any and all issue taxes
(but not income taxes) which may be imposed in respect of any issue or
delivery of stock upon the conversion of any shares of Series D Preferred
Stock, but all transfer taxes and income taxes that may be payable in
respect of any change of ownership of Series D Preferred Stock or any rights
represented thereby or of stock receivable upon conversion thereof shall be
paid by the person or persons surrendering such stock for conversion.
(k) In the event a Holder shall elect to convert any shares of
Series D Preferred Stock as provided herein, the Corporation cannot refuse
conversion based on any claim that such Holder or any one associated or
affiliated with such Holder has been engaged in any violation of law,
unless, an injunction from a court, on notice, restraining and or enjoining
conversion of all or part of said shares of Series D Preferred Stock shall
have been issued and the Corporation posts a surety bond for the benefit of
such Holder in the amount of 126% of the Stated Value of the Series D
Preferred Stock and dividends sought to be converted, which is subject to
the injunction, which bond shall remain in effect until the completion of
arbitration/litigation of the dispute and the proceeds of which shall be
payable to such Holder in the event it obtains judgment.
(l) In addition to any other rights available to the Holder, if the
Corporation fails to deliver to the Holder such certificate or certificates
pursuant to Section 4(c) by the Delivery Date and if after the Delivery Date
the Holder purchases (in an open market transaction or otherwise) shares of
Common Stock to deliver in satisfaction of a sale by such Holder of the
Common Stock which the Holder anticipated receiving upon such conversion (a
"Buy-In"), then the Corporation shall pay in cash to the Holder (in addition
to any remedies available to or elected by the Holder) the amount by which
(A) the Holder's total purchase price (including brokerage commissions, if
any) for the shares of Common Stock so purchased exceeds (B) the aggregate
Stated Value of the shares of Series D Preferred Stock for which such
conversion was not timely honored, together with interest thereon at a rate
of 16% per annum, accruing until such amount and any accrued interest
thereon is paid in full (which amount shall be paid as liquidated damages
and not as a penalty). For example, if the Holder purchases shares of Common
Stock having a total purchase price of $11,000 to cover a Buy-In with
respect to an attempted conversion of $10,000 of Stated Value of Series D
Preferred Stock, the Corporation shall be required to pay the Holder $1,000,
plus interest. The Holder shall provide the Corporation written notice
indicating the amounts payable to the Holder in respect of the Buy-In.
5. Mandatory Conversion.
--------------------
(a) The shares of Series D Preferred Stock and dividends not
previously converted into shares of Common Stock shall be converted into
shares of Common Stock without further action of the Holder on the date that
is two years from the date of issuance thereof ("Mandatory Conversion
Date"), at the Conversion Price and on the conversion terms specified in
paragraph 4(b). Deliveries of Common Stock upon Mandatory Conversion shall
be made as if the Mandatory Conversion Date were a Conversion Date.
(b) Notice of conversion of Series D Preferred Stock by the
Corporation pursuant to this paragraph 5 shall be given by mail or in such
other manner as may be prescribed by resolution of the Board not less than
thirty (30) days prior to the Mandatory Conversion Date. As applicable, the
notice shall specify the number of shares to be converted, the date fixed
for conversion, and the conversion price per share.
(c) The Holder of any certificate for shares of Series D Preferred
Stock that is converted pursuant to this Section 5 shall surrender such
certificate at the principal office of any transfer agent for said stock
(the "Transfer Agent") properly endorsed for or accompanied by duly executed
instruments of transfer (and such other transfer papers as said Transfer
Agent may reasonably require). The Holder of the shares so surrendered for
conversion shall be entitled to receive (except as otherwise provided
herein) a certificate or certificates which shall be expressed to be fully
paid and non-assessable for the number of shares of Common Stock to which
such Holder shall be entitled upon such conversion registered in the name of
such Holder.
(d) On and after the Mandatory Conversion Date and notwithstanding
that any certificate for shares of Series D Preferred Stock so called for
conversion shall not have been surrendered for cancellation, all dividends
on the Series D Preferred Stock called for conversion shall cease to accrue
and the shares represented thereby shall no longer be deemed outstanding and
all rights of the Holders thereof as Holders of the Corporation shall cease
and terminate, except the right to receive the shares of Common Stock upon
conversion as provided herein.
(e) In no event shall a Mandatory Conversion occur without the
consent of the Holder of Series D Preferred Stock at any time unless the
Common Stock to be delivered upon conversion will be upon delivery and
thereafter immediately resalable, without restrictive legend and upon such
resale freely transferable on the transfer books of the Corporation. Nor may
the Corporation effect a Mandatory Conversion without the consent of the
Holder after the occurrence (whether continuing or not) of an Event of
Default as defined in Paragraph 2 hereof.
6. Voting Rights. The shares of Series D Preferred Stock shall not
have voting rights.
7. Redemption. From and after 40 days after the Effective Date of
the Registration Statement as defined in Section 10.1(iv) of the
Subscription Agreement, the Corporation will have the option of redeeming
the Series D Preferred Stock ("Optional Redemption") by paying to the Holder
a sum of money equal to the Closing Bid Price of the Common Stock on the
date notice of redemption ("Notice of Redemption) is given to a Holder
("Redemption Date") multiplied by the number of shares of Common Stock that
would be issued upon conversion of the designated amount of Stated Value of
Series D Preferred Stock being redeemed and the dividends accrued thereon,
at the Conversion Price that would be in effect on the Redemption Date
("Redemption Amount") but in no event may the Redemption Amount be less than
120% of the Stated Value of the Series D Preferred Stock being redeemed plus
the dollar amount of accrued dividends on the Series D Preferred Stock being
redeemed. A Notice of Redemption may not be given in connection with any
Series D Preferred Stock for which notice of conversion has been given by
the Holder either before or after receipt by the Holder of a Notice of
Redemption except that after receipt by the Holder of a Notice of Redemption
the Holder may elect by giving written notice to the Corporation within two
(2) business days of a Redemption Date to convert no more than twenty (20%)
percent of the Series D Preferred Stock noticed in the Notice of Redemption.
A Notice of Redemption must be accompanied by a certificate signed by the
chief executive officer or chief financial officer of the Corporation
stating that the Corporation has on deposit and segregated ready funds equal
to the Redemption Amount. The Redemption Amount (less any amount that may be
converted by a Holder) must be paid in good funds to the Holder no later
than the fifth business day after the Redemption Date. In the event the
Corporation fails to pay the Redemption Amount by such date, then the
Redemption Notice will be null and void and the Corporation will thereafter
have no further right to effect an Optional Redemption. Any Notice of
Redemption must be given to all Holders of Series D Preferred Stock in
proportion to their holdings of Series D Preferred Stock on a Redemption
Date. The minimum Redemption Amount must be no less than the sum that would
be realized by the Holder on the Redemption Date of a sale of the amount of
Common Stock receivable upon conversion of the amount of Series D Preferred
Stock being redeemed plus the dollar amount of accrued dividends on the
Series D Preferred Stock being redeemed but in no event may the Redemption
Amount be less than 120% of the Stated Value of the Series D Preferred Stock
being redeemed plus the dollar amount of accrued dividends on the Series D
Preferred Stock being redeemed.
8. Event of Default. The occurrence of any of the following events
of default ("Event of Default") shall, after the applicable period to cure
the Event of Default, cause the dividend rate of 6% described in paragraph 2
hereof to become 12% from and after the occurrence of such event, and the
Holder shall have the option to require the Corporation to redeem the Series
D Preferred Stock held by such Holder by the immediate payment to the Holder
by the Corporation of a sum of money equal to the number of shares that
would be issuable upon conversion of an amount of Stated Valued and accrued
dividends designated by the Holder, at the Conversion Price in effect as of
the trading day prior to the date notice is given to the Corporation
multiplied by the average closing ask price of the Corporation's Common
Stock on such date:
(a) The Corporation fails to pay any dividend payment required to
be paid pursuant to the terms of paragraph 2 hereof or the failure to timely
pay any other sum of money due to the Holder from the Company and such
failure continues for a period of ten (10) days after written notice to the
Corporation from the Holder.
(b) The Corporation breaches any material covenant, term or
condition of the Subscription Agreement entered into between the Corporation
and Holder relating to Series D Preferred Stock or in this Certificate of
Designation, and such breach continues for a period of seven (7) days after
written notice to the Corporation from the Holder.
(c) Any material representation or warranty of the Corporation made
in the Subscription Agreement, or in any agreement, statement or certificate
given in writing pursuant thereto shall be false or misleading.
(d) The Corporation shall make an assignment of a substantial part
of its property or business for the benefit of creditors, or apply for or
consent to the appointment of a receiver or trustee for it or for a
substantial part of its property or business, or such a receiver or trustee
shall otherwise be appointed.
(e) Any money judgment, confession of judgment, writ or similar
process shall be entered against the Corporation or its property or other
assets for more than $100,000, and is not vacated, satisfied, bonded or
stayed within 45 days.
(f) Bankruptcy, insolvency, reorganization or liquidation
proceedings or other proceedings or relief under any bankruptcy law or any
law for the relief of debtors shall be instituted by or against the
Corporation.
(g) The failure to maintain a listing of the Common Stock on the
NASD OTC Bulletin Board (or successor market, if any).
(h) An order entered by a court of competent jurisdiction, or by
the Securities and Exchange Commission, or by the National Association of
Securities Dealers, preventing purchase and sale transactions in the
Corporation's Common Stock.
(i) The Corporation's failure to timely deliver Common Stock to the
Holder pursuant to paragraph 4 hereof or the Subscription Agreement.
(j) The occurrence of a Non-Registration Event as described in
Section 10.4 of the Subscription Agreement.
9. Status of Converted or Redeemed Stock. In case any shares of
Series D Preferred Stock shall be redeemed or otherwise repurchased or
reacquired, the shares so redeemed, converted, or reacquired shall resume
the status of authorized but unissued shares of Preferred Stock and shall no
longer be designated as Series D Preferred Stock.
10. Additional Restrictions. Until 180 days after the Effective
Date, as defined in Section 10.1(iv) of the Subscription Agreement and
provided that shares of the Series D Preferred Stock are then outstanding,
the Corporation will not issue any preferred stock that will be senior to
the Series D Preferred Stock except that the Corporation may issue such
preferred stock provided such preferred stock is not senior to the Series D
Preferred Stock during the 180 day period commencing on the Effective Date
of the above described Registration Statement. For so long as any shares of
Series D Preferred Stock are outstanding, the Corporation will not amend the
terms of any outstanding class of Preferred Stock of the Company, and will
not amend the terms of the Series D Preferred Stock without the written
consent of the Holder of the Series D Preferred Stock.
CHINA PEREGRINE FOOD CORPORATION
Dated: January , 2000 By:_________________________________
Roy G. Warren, President
EXHIBIT A
---------
NOTICE OF CONVERSION
(To Be Executed By the Registered Holder in Order to Convert the Series D
Convertible Preferred Stock of China Peregrine Food Corporation)
The undersigned hereby irrevocably elects to convert $______________
of the Stated Value of the above Series D Convertible Preferred Stock into
shares of Common Stock of China Peregrine Food Corporation (the
"Corporation") according to the conditions hereof, as of the date written
below.
Date of Conversion:_______________________________________________
Applicable Conversion Price Per Share:____________________________
Conversion Price Calculated Pursuant to:
Section 4(b)(i):_________________ or 4(b)(ii)____________________
If pursuant to 4(b)(ii), the three dates and closing prices employed are:
(1)_____________/$______________ (2)______________/$____________
(3)______________$______________
Number of Common Shares Issuable Upon This Conversion:_____________
Signature:_________________________________________________________
Print Name:________________________________________________________
Address:___________________________________________________________
___________________________________________________________________
Deliveries Pursuant to this Notice of Conversion Should Be Made to:
___________________________________________________________________
___________________________________________________________________
Exhibit 4(g)
CERTIFICATE TO SET FORTH DESIGNATIONS, VOTING POWERS,
PREFERENCES, LIMITATIONS, RESTRICTIONS, AND RELATIVE
RIGHTS OF SERIES F CONVERTIBLE
PREFERRED STOCK, $.001 PAR VALUE PER SHARE
It is hereby certified that:
I. The name of the corporation is China Premium Food Corporation (the
"Corporation"), a Delaware corporation.
II. Set forth hereinafter is a statement of the voting powers,
preferences, limitations, restrictions, and relative rights of shares of
Series F Convertible Preferred Stock hereinafter designated as contained in
a resolution of the Board of Directors of the Corporation pursuant to a
provision of the Articles of Incorporation of the Corporation permitting
the issuance of said Series F Convertible Preferred Stock by resolution of
the Board of Directors:
Series F Convertible Preferred Stock, $.001 par value.
1. Designation: Number of Shares. The designation of said series of
Preferred Stock shall be Series F Convertible Preferred Stock (the "Series
F Preferred Stock"). The number of shares of Series F Preferred Stock shall
be 165,000. Each share of Series F Preferred Stock shall have a stated
value equal to $10 (as adjusted for any stock dividends, combinations or
splits with respect to such shares) (the "Stated Value"), and a par value
of $0.001 per Series F Preferred Share.
2. Dividends, Distributions and Liquidation Rights. The Holders of
outstanding shares of Series F Preferred Stock shall be entitled to
dividends and distributions (whether in cash or property or securities,
including dividends and distributions which are paid or intended to be paid
in connection with distributions of the Corporation's assets upon the
voluntary or involuntary liquidation, dissolution or winding up of the
Corporation) when declared by the Corporations' Board of Directors on the
Common Stock (as defined in Section 3(i) below) on an as converted basis,
together with payments to the holders of the Common Stock. Each share of
Series F Preferred Stock with respect to dividend payments shall be equal
in every respect to every other share of Series F Preferred Stock.
3. Conversion into Common Stock. Shares of Series F Preferred Stock
shall have the following conversion rights and obligations:
(a) Subject to the further provisions of this paragraph 3 each Holder of
shares of Series F Preferred Stock shall have the right at any time
commencing after the filing of this Certificate of Designation with the
Office of the Secretary of State of Delaware, to convert such shares into
fully paid and non-assessable shares of Common Stock of the Corporation (as
defined in paragraph 3(i) below) determined in accordance with the
Conversion Price provided in paragraph 3(b) below (the "Conversion Price");
provided, that the aggregate Stated Value to be converted shall be at least
$10,000 (unless if at the time of such conversion the aggregate Stated
Value of all shares of Series F Preferred Stock registered to the Holder is
less than $10,000, then the whole amount may be converted).
(b) The number of shares of Common Stock issuable upon conversion of
each share of Series F Preferred Stock shall equal the Stated Value per share
divided by the Conversion Price. The Conversion Price shall be equal to $.50,
subject to adjustment as described herein.
(c) The Holder of any certificate for shares of Series F Preferred Stock
desiring to convert any of such shares may give notice of its decision to
convert the shares into common stock by delivering or telecopying an
executed and completed notice of conversion to the Corporation or the
Corporation's Transfer Agent, (but only if such Transfer Agent is appointed
by the Company as transfer agent for the Series F Preferred Stock) and
delivering within three business days thereafter, the original notice of
conversion and the certificate for the Preferred Stock properly endorsed
for or accompanied by duly executed instruments of transfer (and such other
transfer papers as said Transfer Agent may reasonably require) to the
Corporation or the Corporation's Transfer Agent. Each date on which a
notice of conversion is delivered or telecopied to the Corporation or the
Corporation's Transfer Agent in accordance with the provisions hereof shall
be deemed a Conversion Date. A form of Notice of Conversion that may be
employed by a Holder is annexed hereto as Exhibit A. The Corporation will
transmit the certificates representing the shares of common stock issuable
upon conversion of any Series F Preferred Stock (together with the Series F
Preferred Stock representing the shares not converted) to the Holder via
express courier, by electronic transfer or otherwise, within three business
days after receipt by the Corporation of the original notice of conversion
and the Series F Preferred Stock representing the shares to be converted
("Delivery Date"). The Holder of the shares so surrendered for conversion
shall be entitled to receive on or before the Delivery Date a certificate
or certificates which shall be expressed to be fully paid and non-
assessable for the number of shares of Common Stock to which such Holder
shall be entitled upon such conversion registered in the name of such
Holder. In the case of any Series F Preferred Stock which is converted in
part only the Holder of shares of Series F Preferred Stock shall upon
delivery of the certificate or certificates representing Common Stock also
receive a new share certificate representing the unconverted portion of the
shares of Series F Preferred Stock. Nothing herein shall be construed to
give any Holder of shares of Series F Preferred Stock surrendering the same
for conversion the right to receive any additional shares of Common Stock
or other property which results from an adjustment in conversion rights
under the provisions of paragraph (d) or (e) of this paragraph 3 until
Holders of Common Stock are entitled to receive the shares or other
property giving rise to the adjustment.
In the case of the exercise of the conversion rights set forth in
paragraph 3(a) the conversion privilege shall be deemed to have been exercised
and the shares of Common Stock issuable upon such conversion shall be deemed to
have been issued upon the date of receipt by the Corporation or Transfer
Agent of the Notice of Conversion. The person or entity entitled to
receive Common Stock issuable upon such conversion shall, on the date such
conversion privilege is deemed to have been exercised and thereafter, be
treated for all purposes as the record Holder of such Common Stock and
shall on the same date cease to be treated for any purpose as the record
Holder of such shares of Series F Preferred Stock so converted.
The Corporation shall not be required, in connection with any conversion
of Series F Preferred Stock, to issue a fraction of a share of its Common
Stock and shall instead deliver a stock certificate representing the next
whole number.
The Corporation and Holder may not convert that amount of the Series F
Preferred Stock on a Conversion Date in connection with that number of
shares of Common Stock which would be in excess of the sum of (i) the
number of shares of Common Stock beneficially owned by the Subscriber and
its affiliates on such Conversion Date, and (ii) the number of shares of
Common Stock issuable upon the conversion of the Series F Preferred Stock
with respect to which the determination of this proviso is being made on
such Conversion Date, which would result in beneficial ownership by the
Holder and its affiliates of more than 9.99% of the outstanding shares of
Common Stock of the Corporation. For the purposes of the proviso to the
immediately preceding sentence, beneficial ownership shall be determined in
accordance with Section 13(d) of the Securities Exchange Act of 1934, as
amended, and Regulation 13d-3 thereunder. The Holder may allocate which of
the equity of the Corporation deemed beneficially owned by the Holder shall
be included in the 9.9% amount described above and which shall be allocated
to the excess above 9.99%.
(d) The Conversion Price shall be subject to adjustment from time to
time as follows:
(i) In case the Corporation shall at any time (A) split or
subdivide the outstanding Common Stock, (B) combine the outstanding
Common Stock into a smaller number of shares, or (C) issue by
reclassification of its Common Stock any shares or other securities of
the Corporation, then in each such event the Conversion Price shall be
adjusted proportionately so that the Holders of Series F Preferred Stock
shall be entitled to receive the kind and number of shares or other
securities of the Corporation which such Holders would have owned or
have been entitled to receive after the happening of any of the events
described above had such shares of Series F Preferred Stock been
converted immediately prior to the happening of such event (or any record
date with respect thereto). Such adjustment shall be made whenever any
of the events listed above shall occur. An adjustment made to the
Conversion pursuant to this paragraph 3(d)(i) shall become effective
immediately after the effective date of the event retroactive to the
record date, if any, for the event.
(e) (i) In case of any merger of the Corporation with or into any other
corporation (other than a merger in which the Corporation is the surviving
or continuing corporation and which does not result in any
reclassification, conversion, or change of the outstanding shares of Common
Stock) then unless the right to convert shares of Series F Preferred Stock
shall have terminated, as part of such merger lawful provision shall be
made so that Holders of Series F Preferred Stock shall thereafter have the
right to convert each share of Series F Preferred Stock into the kind and
amount of shares of stock and/or other securities or property receivable
upon such merger by a Holder of the number of shares of Common Stock into
which such shares of Series F Preferred Stock might have been converted
immediately prior to such consolidation or merger. Such provision shall
also provide for adjustments which shall be as nearly equivalent as may be
practicable to the adjustments provided for in paragraph (d) of this
paragraph 3. The foregoing provisions of this paragraph 3(e) shall
similarly apply to successive mergers.
(ii) In case of any sale or conveyance to another person or entity
of the property of the Corporation as an entirety, or substantially as an
entirety, in connection with which shares or other securities or cash or
other property shall be issuable, distributable, payable, or deliverable
for outstanding shares of Common Stock, then, unless the right to convert
such shares shall have terminated, lawful provision shall be made so that
the Holders of Series F Preferred Stock shall thereafter have the right
to convert each share of the Series F Preferred Stock into the kind and
amount of shares of stock or other securities or property that shall be
issuable, distributable, payable, or deliverable upon such sale or
conveyance with respect to each share of Common Stock immediately prior
to such conveyance.
(f) Whenever the number of shares to be issued upon conversion of the
Series F Preferred Stock is required to be adjusted as provided in this
paragraph 3, the Corporation shall forthwith compute the adjusted number of
shares to be so issued and prepare a certificate setting forth such
adjusted conversion amount and the facts upon which such adjustment is
based, and such certificate shall forthwith be filed with the Transfer
Agent for the Series F Preferred Stock and the Common Stock; and the
Corporation shall mail to each Holder of record of Series F Preferred Stock
notice of such adjusted conversion price.
(g) In case at any time the Corporation shall propose:
(i) to pay any dividend or distribution payable in shares upon its
Common Stock or make any distribution (other than cash dividends) to the
Holders of its Common Stock; or
(ii) to offer for subscription to the Holders of its Common Stock
any additional shares of any class or any other rights; or
(iii) any capital reorganization or reclassification of its shares
or the merger of the Corporation with another corporation (other than a
merger in which the Corporation is the surviving or continuing
corporation and which does not result in any reclassification,
conversion, or change of the outstanding shares of Common Stock); or
(iv) the voluntary dissolution, liquidation or winding-up of the
Corporation;
then, and in any one or more of said cases, the Corporation shall cause at
least fifteen (15) days prior notice of the date on which (A) the books of
the Corporation shall close or a record be taken for such stock dividend,
distribution, or subscription rights, or (B) such capital reorganization,
reclassification, merger, dissolution, liquidation or winding-up shall take
place, as the case may be, to be mailed to the Transfer Agent for the
Series F Preferred Stock and for the Common Stock and to the Holders of
record of the Series F Preferred Stock.
(h) So long as any shares of Series F Preferred Stock shall remain
outstanding and the Holders thereof shall have the right to convert the
same in accordance with provisions of this paragraph 3 the Corporation
shall at all times reserve from the authorized and unissued shares of its
Common Stock a sufficient number of shares to provide for such conversions.
(i) The term Common Stock as used in this paragraph 3 shall mean the
$.001 par value Common Stock of the Corporation as such stock is constituted at
the date of issuance thereof or as it may from time to time be changed or
shares of stock of any class of other securities and/or property into which
the shares of Series F Preferred Stock shall at any time become convertible
pursuant to the provisions of this paragraph 3.
(j) The Corporation shall pay the amount of any and all issue taxes (but
not income taxes) which may be imposed in respect of any issue or delivery
of stock upon the conversion of any shares of Series F Preferred Stock, but
all transfer taxes and income taxes that may be payable in respect of any
change of ownership of Series F Preferred Stock or any rights represented
thereby or of stock receivable upon conversion thereof shall be paid by the
person or persons surrendering such stock for conversion.
(k) In the event a Holder shall elect to convert any shares of Series F
Preferred Stock as provided herein, the Corporation may not refuse
conversion based on any claim that such Holder or any one associated or
affiliated with such Holder has been engaged in any violation of law,
unless, an injunction from a court, on notice, restraining and or enjoining
conversion of all or part of said shares of Series F Preferred Stock shall
have been issued and the Corporation posts a surety bond for the benefit of
such Holder in the amount of 125% of the Stated Value of the Series F
Preferred Stock and dividends sought to be converted, which is subject to
the injunction, which bond shall remain in effect until the completion of
arbitration/litigation of the dispute and the proceeds of which shall be
payable to such Holder in the event it obtains judgment.
(l) In addition to any other rights available to the Holder, if the
Corporation fails to deliver to the Holder such certificate or certificates
pursuant to Section 3(c) by the Delivery Date and if after the Delivery
Date the Holder purchases (in an open market transaction or otherwise)
shares of Common Stock to deliver in satisfaction of a sale by such Holder
of the Common Stock which the Holder anticipated receiving upon such
conversion (a "Buy-In"), then the Corporation shall pay in cash to the
Holder (in addition to any remedies available to or elected by the Holder)
the amount by which (A) the Holder's total purchase price (including
brokerage commissions, if any) for the shares of Common Stock so purchased
exceeds (B) the aggregate Stated Value of the shares of Series F Preferred
Stock for which such conversion was not timely honored, together with
interest thereon at a rate of 16% per annum, accruing until such amount and
any accrued interest thereon is paid in full (which amount shall be paid as
liquidated damages and not as a penalty). For example, if the Holder
purchases shares of Common Stock having a total purchase price of $11,000
to cover a Buy-In with respect to an attempted conversion of $10,000 of
Stated Value of Series F Preferred Stock, the Corporation shall be required
to pay the Holder $1,000, plus interest. The Holder shall provide the
Corporation written notice indicating the amounts payable to the Holder in
respect of the Buy-In.
4. Voting Rights. The shares of Series F Preferred Stock shall not have
voting rights.
5. Event of Default. Upon the occurrence of any of the following events
of default ("Event of Default"), after the applicable period to cure the
Event of Default, the Holder shall have the option to require the
Corporation to redeem the Series F Preferred Stock held by such Holder by
the immediate payment to the Holder by the Corporation of a sum of money
equal to the Stated Value of the Series F Preferred Stock held by the
Holder multiplied by 125%:
(a) The Corporation fails to pay any sum of money due to the Holder from
the Company (excluding dividends) and such failure continues for a period
of ten (10) days after written notice to the Corporation from the Holder.
(b) The Corporation breaches any material covenant, term or condition of
the Subscription Agreement entered into between the Corporation and Holder
relating to Series F Preferred Stock or in this Certificate of Designation,
and such breach continues for a period of seven (7) days after written
notice to the Corporation from the Holder.
(c) Any material representation or warranty of the Corporation made in
the Subscription Agreement, or in any agreement, statement or certificate given
in writing pursuant thereto shall be false or misleading.
(d) The Corporation shall make an assignment of a substantial part of
its property or business for the benefit of creditors, or apply for or consent
to the appointment of a receiver or trustee for it or for a substantial
part of its property or business, or such a receiver or trustee shall
otherwise be appointed.
(e) Any money judgment, confession of judgment, writ or similar process
shall be entered against the Corporation or its property or other assets
for more than $100,000, and is not vacated, satisfied, bonded or stayed
within 45 days.
(f) Bankruptcy, insolvency, reorganization or liquidation proceedings or
other proceedings or relief under any bankruptcy law or any law for the
relief of debtors shall be instituted by or against the Corporation.
(g) The failure to maintain a listing of the Common Stock on the NASD
OTC Bulletin Board (or successor market, if any).
(h) An order entered by a court of competent jurisdiction, or by the
Securities and Exchange Commission, or by the National Association of
Securities Dealers, preventing purchase and sale transactions in the
Corporation's Common Stock.
(i) The Corporation's failure to timely deliver Common Stock to the
Holder pursuant to paragraph 4 hereof or the Subscription Agreement.
(j) The occurrence of a Non-Registration Event as described in Section
10.4 of the Subscription Agreement.
6. Status of Converted or Redeemed Stock. In case any shares of Series
F Preferred Stock shall be redeemed or otherwise repurchased or reacquired,
the shares so redeemed, converted, or reacquired shall resume the status of
authorized but unissued shares of Preferred Stock and shall no longer be
designated as Series F Preferred Stock.
CHINA PREMIUM FOOD CORPORATION
Dated: April 6, 2000 /S/ Roy G. Warren
By:_________________________________
Roy G. Warren, President
EXHIBIT A
---------
NOTICE OF CONVERSION
(To Be Executed By the Registered Holder in Order to Convert the Series F
Convertible Preferred Stock of China Premium Food Corporation)
The undersigned hereby irrevocably elects to convert $______________ of the
Stated Value of the above Series F Convertible Preferred Stock into shares
of Common Stock of China Premium Food Corporation (the "Corporation")
according to the conditions hereof, as of the date written below.
Date of Conversion:_______________________________________________
Applicable Conversion Price Per Share:____________________________
Number of Common Shares Issuable Upon This Conversion:_____________
Signature:_________________________________________________________
Print Name:________________________________________________________
Address:___________________________________________________________
___________________________________________________________________
Deliveries Pursuant to this Notice of Conversion Should Be Made to:
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the December
31, 1998 and 1999 audited financial statements and is qualified in its entirety
by such financial statements.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1999
<PERIOD-END> DEC-31-1998 DEC-31-1999
<CASH> 305,233 16,854
<SECURITIES> 0 0
<RECEIVABLES> 235,000 0
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 557,765 35,050
<PP&E> 89,198 131,264
<DEPRECIATION> 46,709 175,261
<TOTAL-ASSETS> 2,711,654 1,866,170
<CURRENT-LIABILITIES> 303,255 528,574
<BONDS> 0 0
0 0
1,645,500 2,067,713
<COMMON> 7,718 10,278
<OTHER-SE> 7,781,062 11,256,952
<TOTAL-LIABILITY-AND-EQUITY> 2,711,654 1,866,170
<SALES> 0 0
<TOTAL-REVENUES> 0 0
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 1,260,588 2,622,788
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (14,552) 15,539
<INCOME-PRETAX> (2,461,829) (4,017,334)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (2,660,780) (4,975,511)
<EPS-BASIC> (0.41) (0.67)
<EPS-DILUTED> 0 0
</TABLE>
EXHIBIT 99.1
HANGZHOU MEILIJIAN DAIRY PRODUCTS CO. LTD.
____________________________
REPORT ON AUDITED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1999
_____________________________
HANGZHOU MEILIJIAN DAIRY PRODUCTS CO. LTD.
INDEX TO FINANCIAL STATEMENTS
Report of Independent Certified Public Accountants F-2
Financial Statements
Balance Sheets F-3
Statements of Operations and Comprehensive Loss F-4
Statements of Investors' Equity F-5
Statements of Cash Flows F-6
Summary of Accounting Policies F-7
Notes to Financial Statements F-11
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
China Premium Food Corporation:
We have audited the accompanying balance sheets of Hangzhou Meilijian Dairy
Products Co. Ltd. (a Chinese limited liability company) as of December 31,
1998 and 1999, and the related statements of operations, and comprehensive
loss, investors' equity and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards in the United States. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall presentation of the financial statements. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Hangzhou Meilijian Dairy
Products Co. Ltd. as of December 31, 1998 and 1999, and the results of its
operations and its cash flows for each of the years then ended in conformity
with generally accepted accounting principles in the United States.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Basis of
Presentation to the financial statements, the Company has experienced
operating losses since inception. These matters raise substantial doubt
about the Company's ability to continue as a going concern. Management's
plans in regard to these matters are also described in Basis of Presentation
to the financial statements. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
BDO SEIDMAN, LLP
Los Angeles, California
February 25, 2000
HANGZHOU MEILIJIAN DAIRY PRODUCTS CO. LTD.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
--------------------------
1998 1999
---- ----
<S> <C> <C>
ASSETS (Note 3)
Current assets:
Cash and cash equivalents $ 373,004 $ 332,553
Accounts receivable, less allowances for
doubtful accounts of $631,701 and
$763,973 for 1998 and 1999 190,460 153,323
Other receivable, less allowance for
doubtful accounts of $199,613 and
$214,789 for 1998 and 1999 33,329 74,871
Inventory (Note 1) 822,544 343,632
Prepaid expenses 38,413 27,065
--------------------------
Total current assets 1,457,750 931,443
--------------------------
Property, plant and equipment, net
(Notes 2 and 3) 4,363,126 4,444,790
Other assets, net of amortization of
$87,074 and $110,342 for 1998 and 1999 130,533 107,257
--------------------------
Total assets $5,951,409 $5,483,490
==========================
LIABILITIES AND INVESTORS' EQUITY
Current liabilities:
Bank loans (Note 3) $1,425,345 $1,425,207
Accounts payable 661,991 425,329
Advance from customers 234,324 302,132
Accrued liabilities 79,725 112,355
--------------------------
Total current liabilities 2,401,385 2,265,023
Long-term related party loans (Note 4) 868,538 910,383
--------------------------
Total liabilities 3,269,923 3,175,406
--------------------------
Commitments and contingencies (Note 6)
Investors' equity:
Paid-in capital 5,100,000 5,389,073
Appropriated earnings 153,521 153,521
Accumulated deficits (1,840,482) (2,502,792)
Accumulated other comprehensive loss -
translation adjustment (731,553) (731,718)
--------------------------
Total investors' equity 2,681,486 2,308,084
--------------------------
Total liabilities and investors' equity $5,951,409 $5,483,490
==========================
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
HANGZHOU MEILIJIAN DAIRY PRODUCTS CO. LTD.
STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
<TABLE>
<CAPTION>
December 31,
--------------------------
1998 1999
---- ----
<S> <C> <C>
Net sales $4,873,748 $5,664,661
Cost of sales (Note 4) 4,241,471 4,896,144
--------------------------
Gross profit 632,277 768,517
Selling expense 445,662 629,564
General and administrative expense 415,991 664,921
--------------------------
Loss from operations (229,376) (525,968)
Other income (expense):
Interest expense, net (175,205) (129,810)
Loss disposal of property, plant
and equipment (7,404) (7,471)
Other, net (3,193) 939
--------------------------
Loss before income taxes (415,178) (662,310)
Income tax provision (Note 5) - -
--------------------------
Net loss $ (415,178) $ (662,310)
Other comprehensive income (loss) -
translation adjustment 380 (165)
--------------------------
Comprehensive loss $ (414,798) $ (662,475)
==========================
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
HANGZHOU MEILIJIAN DAIRY PRODUCTS CO. LTD.
STATEMENTS OF INVESTORS' EQUITY
<TABLE>
<CAPTION>
Paid-In Capital Accumulated
-------------------------- Other
China Comprehensive
Hangzhou Premium Income (Loss) -
United Dairy Food Appropriated Accumulated Translation
Co., Ltd Corp. Earnings Deficit Adjustment Total
------------ ------- ------------ ----------- --------------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1998 $2,448,000 $2,652,000 $153,521 $(1,425,304) $(731,933) $3,096,284
Net loss - - - (415,178) - (415,178)
Translation adjustments - - - - 380 380
-------------------------------------------------------------------------------------
Balance, December 31, 1998 2,448,000 2,652,000 153,521 (1,840,482) (731,553) 2,681,486
Paid-in capital 289,073 - - - - 289,073
Net loss - - - (662,310) - (662,310)
Translation adjustments - - - - (165) (165)
-------------------------------------------------------------------------------------
Balance, December 31, 1999 $2,737,073 $2,652,000 $153,521 $(2,502,792) $(731,718) $2,308,084
=====================================================================================
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
HANGZHOU MEILIJIAN DAIRY PRODUCTS CO. LTD.
STATEMENTS OF CASH FLOWS
Increase (Decrease in Cash and Cash Equivalents)
<TABLE>
<CAPTION>
For Years Ended
December 31,
-----------------------------
1998 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (415,178) $ (662,310)
Adjustments to reconcile net loss to
net cash provided by operating
activities:
Depreciation and amortization 345,100 370,511
Provision for bad debts (12,012) 145,601
Provision for inventory reserve 37,288 195,879
Loss on disposal of fixed assets 7,404 7,471
Increase (decrease) from changes in:
Accounts receivable 51,443 (93,245)
Other receivable 17,162 (56,718)
Inventory 346,198 283,033
Prepaid expenses 51,572 11,348
Accounts payable (238,297) (236,662)
Advances from customers (8,955) 67,808
Accrued liabilities (55,127) 32,630
-----------------------------
Net cash provided by operating activities 126,598 65,347
-----------------------------
Cash flows from investing activities:
Proceeds from disposal of fixed assets 4,935 382
Purchase of equipment and machinery (87,289) (148,072)
-----------------------------
Net cash used in investing activities (82,354) (147,690)
-----------------------------
Cash flows from financing activities:
Proceeds from related party loans 66,984 54,351
Repayments of related party loans (86,125) (12,424)
Proceeds from bank loans 3,454,649 3,478,471
Repayments for bank loans (3,333,857) (3,478,471)
-----------------------------
Net cash provided by financing activities 101,651 41,927
-----------------------------
Effect of changes in exchange rates on cash 30 (36)
-----------------------------
Net increase (decrease) in cash and cash
equivalents 145,925 (40,451)
Cash and cash equivalents, beginning of
period 227,079 373,004
-----------------------------
Cash and cash equivalents, end of period $ 373,004 $ 332,553
=============================
Supplementary information:
Cash paid during the year:
Interest $ 163,212 $ 133,191
=============================
</TABLE>
Supplemental Disclosure of Non-Cash Activities:
In January 1999 the Chinese investor contributed $289,073 worth of machinery
at fair market value which was recorded as paid in capital.
See accompanying summary of accounting policies and notes to financial
statements.
HANGZHOU MEILIJIAN DAIRY PRODUCTS CO. LTD.
SUMMARY OF ACCOUNTING POLICIES
Basis of Presentation
Hangzhou Meilijian Dairy Products Co. Ltd. (the Company) is a foreign
investment joint venture with US$5.1 million of registered capital. The
Company was established under the laws of the People's Republic of China on
October 25, 1993. American Flavor China, Inc. (AFC), a U.S. Delaware
company, has a 52% interest in the Company and Hangzhou United Dairy Company
(HDC) has a 48% interest in the Company. The Company manufactures and
distributes dairy products and juice based ultra high temperature (UHT)
products to distributors, retailers and residents in the City of Hangzhou.
On August 1, 1998, the China Premium Food Corporation (CPFC) acquired 100%
of AFC's equity interest in the Company.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As shown in the accompanying financial
statements, the Company has suffered operating losses and negative working
capital in 1998 and 1999 and has an accumulated deficit of $2,502,792 at
December 31, 1999. These conditions give rise to substantial doubt about the
Company's ability to continue as a going concern. Management's plan includes
attempting to improve gross profit margins and obtain additional financing.
However, there can be no assurance that the Company will realize these plans
for funding of current operations and to meet its obligations. The
accompanying financial statements do not include any provisions or
adjustments, which might result from the outcome of the uncertainty
discussed above.
Basis of Accounting
The financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America (U.S. GAAP)
and are presented in U.S. dollars.
Revenue Recognition
The Company recognizes revenue when the risk of loss for the product passes
to the customer, which is generally when goods are shipped.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
Inventory Valuation
Inventory is stated at the lower of cost or market. Costs are determined on
a weighted average basis
Foreign Currency Translation and Transactions
The financial position and results of operations of the Company are
determined using local currency as the functional currency. Assets and
liabilities are translated at the prevailing exchange rate in effect at the
end of each reporting period. Contributed capital accounts are translated
using the historical rate of exchange at the time of capital contribution.
Income statement accounts are translated at the average rate of exchange
during the reporting period. Translation adjustments arising from the use
of different exchange rates from period to period are included in the
cumulative translation adjustment account in investors' equity. Gains and
losses resulting from foreign currency transactions are included in other
income (expense).
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is computed
primarily using the straight-line method over the estimated useful lives of
the assets as follows :
<TABLE>
<CAPTION>
Estimated Useful Life
(in years)
---------------------
<S> <C>
Plant and building 20
Machinery and equipment 10
Office equipment 5
Vehicles 5
</TABLE>
Construction in progress is stated at cost. All direct construction costs
are capitalized as long term assets. No interest has been capitalized.
Maintenance, repairs and minor renewals are charged directly to expenses as
incurred. Additions and betterment to property and equipment are
capitalized. When assets are disposed of, the related cost and accumulated
depreciation are removed from the accounts and any resulting gain or loss is
included in the statement of operations.
Value Added Tax
The Company is subject to value added tax (VAT) imposed by the Chinese
government on the Company's domestic sales. The output VAT is 17% for sale
of sweet milk, milk powder and other products and 13% for sale of fresh milk
and UHT products. The input VAT is paid when the Company purchases raw
materials. The input VAT can be offset against output VAT and the VAT
payable balance on the Balance Sheet is the net VAT and is included in
accrued liabilities.
Other Assets
Other assets are composed of trademarks and costs to upgrade utility
capacity, such as telephone, electricity and water supply. All these costs
are amortized over a period of ten years.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of financial statements and the reported
amounts of revenue and expenses during the reporting period. Among the more
significant estimates included in these financial statements are the
estimated allowance for doubtful accounts receivable and the deferred income
tax asset allowance. Actual results could differ from those estimates.
Accounts Receivable and Concentration of Credit Risk
The Company's main business is manufacturing and distribution. Sales are
made for cash or on credit. The Company reviews its accounts receivable on
a regular basis to determine if any allowance for doubtful accounts is
necessary at the end each reporting period. The Company maintains its cash
accounts in high quality financial institutions.
Fair Value of Financial Instruments
The carrying amount of cash, trade accounts receivable, notes receivable,
trade accounts payable and accrued payable are reasonable estimates of their
fair value because of the short maturity of these items. The carrying
amounts of the Company's credit facilities approximate fair value because
the interest rates on these instruments are subject to change with market
interest rates.
Income Taxes
The Company accounts for income taxes using the liability method, which
requires an entity to recognize deferred tax liabilities and assets.
Deferred income taxes are recognized based on the differences between the
tax bases of assets and liabilities and their reported amounts in the
financial statements which will result in taxable or deductible amounts in
future years. Further, the effects of enacted tax laws or rate changes are
included as part of deferred tax expenses or benefits in the period that
covers the enactment date. A valuation allowance is recognized if it is
more likely than not that some portion, or all of, a deferred tax asset will
not be realized.
Appropriated Earnings
Under Chinese law, the Company must appropriate some of its after tax
profit, generated through operations, before any profit distribution which
is determined by the Board of Directors of the Company. The three types of
funds which need to be appropriated are the enterprise expansion fund,
reserve fund, and employee bonus and welfare fund. The reserve fund and
enterprise expansion fund, which are reported as appropriated earnings, are
non-distributable in nature but can be used to offset prior year's losses or
converted into paid-in capital.
According to the Chinese government regulations, the employee welfare fund
can be used only for the collective benefit of the Company's employees, such
as the construction of dormitories, a cafeteria and other employees welfare
facilities. This fund is reported as part of liabilities. Under U.S. GAAP,
the appropriations to this fund are charged to general and administrative
expenses as employee fringe benefit.
New Accounting Standards Not Adopted Yet
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Standards No. 133, "Accounting for Derivative Instruments and
Hedging Activities" (SFAS No. 133). 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 derivatives contracts either
to hedge existing risks or for speculative purposes. Accordingly, the
Company does not expect adoption of the new standard on January 1, 2001 to
affect its financial statements.
The Accounting Standards Executive Committee issued Statement of Position
("SOP") 98-5 "Reporting on the Costs of Start-Up Activities" which will be
effective for financial statements for fiscal years after December 15, 1998
and requires that costs of start-up activities, including organization
costs, be expensed as incurred. In accordance with SOP 98-5, the Company
wrote off any remaining organizational expenses in 1999.
HANGZHOU MEILIJIAN DAIRY PRODUCTS CO. LTD.
NOTES TO FINANCIAL STATEMENTS
NOTE 1-INVENTORY
Inventory consists of the following:
<TABLE>
<CAPTION>
December 31,
------------------------
1998 1999
---- ----
<S> <C> <C>
Raw materials $ 715,558 $ 518,806
Finished goods 144,277 57,959
Allowance for spoilage (37,291) (233,133)
------------------------
Total $ 822,544 $ 343,632
========================
</TABLE>
NOTE 2-PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of:
<TABLE>
<CAPTION>
December 31,
--------------------------
1998 1999
---- ----
<S> <C> <C>
Plant and buildings $1,278,294 $1,278,171
Machinery 3,897,263 4,196,125
Office equipment 117,636 126,972
Vehicles 258,236 322,992
Construction in process 55,735 102,416
--------------------------
5,607,164 6,026,676
Less: accumulated depreciation and
amortization 1,244,038 1,581,886
--------------------------
Property, plant and equipment, net $4,363,126 $4,444,790
==========================
</TABLE>
Depreciation expenses were $316,496 and $347,244 for the years ended
December 31, 1998, and 1999.
NOTE 3-BANK LOANS
The balances of the short-term bank loans consists of:
<TABLE>
<CAPTION>
December 31,
--------------------------
1998 1999
---- ----
<S> <C> <C>
Bank of China $1,244,157 $1,062,867
Construction Bank of China 181,188 181,170
Industry and Commerce Bank of China - 181,170
--------------------------
Total $1,425,345 $1,425,207
==========================
</TABLE>
The Company obtained revolving lines of credit from the three major state-
owed commercial banks in China for working capital purposes. In aggregate,
these lines of credit allowed the Company to borrow up to RMB13 million
(approximately US$1,570,000 as of December 31, 1999). These lines of credit
have terms ranging from three months to eight months with a floating
interest rate at December 31, 1999 ranging from 6.138% to 6.696% per annum
subject to change based on notice from the central bank, People's Bank of
China. These lines of credit must be paid off when due to avoid penalty
interest.
All these lines of credit were guaranteed by Hangzhou AOYIPOLLEN
Pharmaceutical Co. Ltd., a related party to Hangzhou United Dairy Company.
Starting from September 1997, all the lines of credits from the Bank of
China were collateralized by substantially all the fixed assets of the
Company, in addition to the guarantee provided by Hangzhou AOYIPOLLEN
Pharmaceutical Co., Ltd.
NOTE 4-RELATED PARTY TRANSACTIONS
The balances of related party loans consisted of:
<TABLE>
<CAPTION>
December 31,
----------------------
1998 1999
---- ----
<S> <C> <C>
Due to China Premium Food Corporation (CPFC) $190,956 $190,938
Due to Hangzhou United Dairy Company (HUD) 677,582 719,445
----------------------
Long-term related party loans $868,538 $910,383
======================
</TABLE>
In January 1999, HUD contributed $289,073 worth of machinery to the Company,
which was recorded as paid in capital. Correspondingly, CPFC agreed to
contribute approximately additional $300,000 capital in cash. As of
February 25, 2000, the Company has not received the $300,000.
On January 1, 1994, HDC provided the Company with the use of its trademark,
which was valued at RMB500,000 (approximately US$60,245). The Company
recorded this trademark value as a part of other assets and a shareholder
loan. The Company recorded amortization of RMB50,000 (approximately
US$6,025) per year for trademark and paid cash of RMB50,000 to HDC per year
against the shareholder loan. As of December 31, 1999, the unamortized
balance of the trademark was RMB250,000 (US$30,195)
The Company purchased raw milk of $2,241,285 and $2,761,571 from ranches
owned by Hangzhou raw milk United Dairy Company for the years ended December
31, 1998 and 1999.
NOTE 5-INCOME TAXES
The Company is subject to Chinese Foreign Investment Enterprise Income Tax
of 33%, of which 30% is attributed to the central government and 3% to the
provincial government. As the Company has experienced operating losses, no
income tax was paid for 1998 and 1999.
Under the relevant income tax law, a foreign investment enterprise with an
operating period of more than ten years is entitled to a 100% income tax
credit for the initial two years and 50% income tax credit for the following
three years starting in the first year it has taxable income. In accordance
with China's corporate income tax regulations, the Company had approximately
$1,741,000 of net operation loss carryforward available as of December 31,
1999. Net operating losses are carried forward for five years.
The components of the net deferred tax asset and liability are as follows:
<TABLE>
<CAPTION>
December 31,
------------------------
1998 1999
---- ----
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts $ 208,000 $ 252,000
Inventory reserves 12,000 77,000
Net operating loss carryforward 250,000 575,000
Valuation allowance (470,000) (904,000)
------------------------
$ - $ -
========================
</TABLE>
Management is unable to determine whether it is more likely than not that
benefit of the net deferred tax asset can be realized, therefore, a 100%
valuation allowance has been established.
NOTE 6-COMMITMENTS AND CONTINGENCIES
Commitments
The Company has leased the plant land from the City of Hangzhou under
operating leases expiring at December 31, 2013. Future minimum payments
required under land leases that have an initial or a remaining lease term in
excess of one year at December 31, 1999 are as follows:
<TABLE>
<CAPTION>
Year ended December 31, Amount
- ----------------------- ------
<S> <C>
2000 $ 49,553
2001 39,890
2002 39,890
2003 39,890
2004 39,890
Thereafter 359,007
--------
$568,120
========
</TABLE>
The Company paid a $38,893 and a $39,890 land usage and development fee in
1998 and 1999.
The Company provided cross guarantees on outstanding bank loans
(approximately $1,580,000 and $2,838,404) for Hangzhou AOYIPOLLEN
Pharmaceutical Co. Ltd. at December 31, 1998, and 1999. Hangzhou AOYIPOLLEN
Pharmaceutical Co. Ltd's financial information for the years ended December
31, 1998 and 1999 is as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------
1998 1999
---- ----
<S> <C> <C>
Total assets $7,465,889 $7,517,343
Total liabilities 3,441,873 3,519,643
Total revenue 5,259,179 5,104,512
Net income 212,465 255,452
Total bank loans guaranteed by Meilijain 1,570,200 1,256,145
</TABLE>
EXHIBIT 99.2
GREEN FOOD PEREGRINE CHILDREN'S FOOD CO. LTD.
____________________________
REPORT ON AUDITED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
_____________________________
Green Food Peregrine Children's Food Co. Ltd.
Index to Financial Statements
Report of Independent Certified Public Accountants F-2
Financial Statements
Balance Sheets F-3
Statements of Operations and Comprehensive Loss F-4
Statement of Investor Equity (Deficit) F-5
Statements of Cash Flows F-6
Summary of Accounting Policies F-7
Notes to Financial Statements F-11
Report of Independent Certified Public Accountants
The Board of Directors
China Premium Food Corporation:
We have audited the accompanying balance sheets of Green Food Peregrine
Children's Food Co. Ltd. (a Chinese Limited Liability Company) as of December
31, 1997 and 1998, and the related statements of operations and comprehensive
loss, investors' equity (deficit) and cash flows for years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards in the United States. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the consolidated financial statements. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation of the
financial statements. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Green Food Peregrine
Children's Food Co. Ltd. as of December 31, 1997 and 1998, and the results of
its operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles in the United States.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Basis of
Presentation to the financial statements, the Company has experienced
operating losses since its inception and, at December 31, 1998, has an
investors' deficit of $527,749 that raises substantial doubt about its
ability to continue as a going concern. Management's plans in regard to
these matters are also described in Basis of Presentation to the financial
statements. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
BDO Seidman, LLP
Los Angeles
March 25, 1999
GREEN FOOD PEREGRINE CHILDREN'S FOOD CO. LTD.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
--------------------------
1997 1998
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 183,523 $ 70,352
Accounts receivable, less allowances for
doubtful accounts of $20,546 and $16,803 390,132 319,257
Other receivable 18,135 102,431
Inventory (Note 1) 77,547 45,693
VAT refund receivable 31,525 -
Prepaid expenses 16,628 23,659
Deposits 19,693 -
--------------------------
Total current assets 737,183 561,392
--------------------------
Property, plant and equipment, net (Note 2) 1,738,349 1,410,179
Proprietary technology, net 60,593 52,243
Organizational expenses, net 428,389 238,025
--------------------------
Total assets $2,964,514 $2,261,839
==========================
LIABILITIES AND INVESTORS' EQUITY (DEFICIT)
Current liabilities:
Bank loans (Note 3) $1,026,595 $1,147,523
Related party loan (Note 4) - 529,066
Accounts payable 213,614 181,652
Accrued liabilities 667,176 924,867
VAT Payable - 19,343
Advances from customers 10,681 7,030
--------------------------
Total current liabilities 1,918,066 2,809,481
Long-term bank loan (Note 4) 205,319 -
--------------------------
Total liabilities 2,123,385 2,809,481
--------------------------
Commitments and contingencies (Note 6)
Investors equity:
Paid-in capital 5,000,000 5,000,000
Accumulated deficits (3,938,890) (5,327,549)
Accumulated other comprehensive loss -
translation adjustment (219,981) (220,093)
--------------------------
Total investors' equity (deficit) 841,129 (547,642)
--------------------------
Total liabilities and investors' equity
(deficit) $2,964,514 $2,261,839
==========================
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
GREEN FOOD PEREGRINE CHILDREN'S FOOD CO. LTD.
STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------
1997 1998
---- ----
<S> <C> <C>
Net sales $ 730,195 $ 828,221
Cost of sales 852,277 952,449
----------------------------
Gross profit (122,082) (124,228)
Selling expense 380,836 321,219
General and administrative expense 782,504 737,192
----------------------------
Loss from operations (1,285,422) (1,182,639)
Other income (expense):
Interest (expense) income, net (235,761) (243,254)
Other - net 58,200 37,234
----------------------------
Loss before income taxes (1,462,983) (1,388,659)
Income taxes (Note 5) - -
----------------------------
Net loss $(1,462,983) $(1,388,659)
Other comprehensive income (loss) -
translation adjustment 2,722 (112)
----------------------------
Comprehensive loss $(1,460,261) $(1,388,771)
============================
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
GREEN FOOD PEREGRINE CHILDREN'S FOOD CO. LTD.
STATEMENTS OF INVESTORS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1997 AND 1998
<TABLE>
<CAPTION>
Paid-in Capital
--------------------------------------
Green Accumulated Translation
Food CPFC AmerChina Deficit Adjustment Total
----- ---- --------- ----------- ----------- -----
<S> <C> <C> <C> <C> <C> <C>
January 1, 1996 $1,500,000 $1,870,224 $120,000 $(2,475,907) $(222,703) $ 791,614
Capital injection in 1/97 200,000 200,000
Capital injection in 4/97 929,776 929,776
Capital injection in 4/97 380,000 380,000
Net loss (1,462,983) (1,462,983)
Translation adjustments 2,722 2,722
--------------------------------------------------------------------------------------
December 31, 1997 1,500,000 3,380,000 120,000 (3,938,890) (219,981) 841,129
Equity transfer in 2/98 120,000 (120,000) -
Net loss (1,388,659) (1,388,659)
Translation adjustments (112) (112)
--------------------------------------------------------------------------------------
December 31, 1998 $1,500,000 $3,500,000 $ - $(5,327,549) $(220,093) $(547,642)
======================================================================================
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
GREEN FOOD PEREGRINE CHILDREN'S FOOD CO. LTD.
STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash and Cash Equivalents
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------
1997 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss $(1,462,983) $(1,388,659)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 412,410 388,823
Provision for bad debts 7,362 (3,743)
Loss on disposal in cash fixed assets 868 138,519
Increase (decrease) from changes in:
Accounts receivable (146,986) 74,618
Other receivable 11,976 (84,296)
Inventory (28,216) 31,854
VAT refund receivable (4,366) 31,525
Prepaid expenses and other assets (16,142) 12,652
Accounts payable (155,411) (31,962)
Accrued expenses and other liabilities 87,780 273,383
-----------------------------
Net cash used in operating activities (1,293,708) (557,276)
-----------------------------
Cash flows from investing activities
Purchase of equipment and machinery (29,919) (458)
-----------------------------
Cash flows from financing activities:
Repayment of bank loans (66,279) (84,391)
Proceeds of related party loans 1,509,776 529,066
-----------------------------
Net cash provided by financing activities 1,443,497 444,675
-----------------------------
Effect of exchange rate changes on cash 5,467 (112)
-----------------------------
Net increase (decrease) in cash and cash
equivalents 125,337 (113,171)
Cash and cash equivalents, beginning of year 58,186 183,523
-----------------------------
Cash and cash equivalents, end of year $ 183,523 $ 70,352
=============================
Cash paid during the year:
Interest $ 211,096 $ 132,924
=============================
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
GREEN FOOD PEREGRINE CHILDREN'S FOOD CO. LTD.
SUMMARY OF ACCOUNTING POLICIES
Basis of Presentation
Green Food Peregrine Children's Food Co. Ltd. (the Company) is a foreign
investment joint venture with registered capital of US$5 million and
established under the law of People's Republic of China on July 13, 1993. As
of December 31, 1997, investors equity included holdings of the Company by
China Peregrine Food Corporation (CPFC), a U.S. Delaware company, accounted
for 67.6% of total investors' equity, China National Green Food Company (a
Chinese company) accounted for 30%, and AmerChina, a U.S. Illinois limited
partnership, accounted of 2.4%. In February 1998, CPFC acquired the 2.4%
AmerChina's equity interest in the Company and brought its equity interest
in the Company to 70%.
The Company has been focusing on providing better nutrition for infants and
children in China through the development of advanced food technology and
marketing expertise from the West. Currently, the Company is marketing
dairy products and a number of new and non-carbonated beverages for infants
and school age children and has intended to operate in the cities with
population more than 2 million throughout China.
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. As shown in the accompanying
financial statements, the Company has suffered operating losses since
inception and has an accumulated deficit of $5,327,549 and net investors'
deficit of $547,642 at December 31, 1998. These factors give rise to
substantial doubt about the Company's ability to continue as a going
concern. Management's plan includes attempting to improve gross profit
margins and obtain additional financing for funding the cash flow
requirements of current operations and to meet its obligations as they
become due. However, there can be no assurance that the Company will realize
these plans described above. The accompanying financial statements do not
include any provisions or adjustments, which might result from the outcome
of the uncertainty discussed above.
Revenue Recognition
The Company recognizes revenue when the risk of loss for the product sold
passes to the customer which is generally when goods are shipped.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
Inventory
Inventory are stated at the lower of cost or market. Costs are determined
on a weighted average basis.
Foreign Currency Translation and Transactions
The financial position and results of operations of the Company are
determined using local currency as the functional currency. Assets and
liabilities are translated at the prevailing exchange rate in effect at each
year end. Contributed capital accounts are translated using the historical
rate of exchange when capital was actually injected. Income statement
accounts are translated at the average rate of exchange during the year.
Translation adjustments arising from the use of different exchange rates
from period to period are included in the cumulative translation adjustment
account in investors' equity. Gains and losses resulting from foreign
currency transactions are included in operations.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is computed
primarily utilizing the straight-line method over the estimated useful lives
of the assets as follows:
<TABLE>
<CAPTION>
Estimated Useful Life
(in years)
---------------------
<S> <C>
Plant and building 20
Machinery and equipment 10
Computer, office equipment and furniture 5
Vehicles 5
</TABLE>
Maintenance, repairs and minor renewals are charged directly to expenses as
incurred. Additions and betterment to property and equipment are
capitalized. When assets are disposed of, the related cost and accumulated
depreciation thereon are removed from the accounts and any resulting gain or
loss is included in the statement of income.
VAT Refund Receivable
The Company is subject to value added tax (VAT) imposed by Chinese
government on its domestic sales. The output VAT is 17% for sales of
chocolate milk and 13% for sales of fresh milk. The input VAT is paid when
the Company purchases raw materials. According to government regulation,
the input VAT can be offset against output VAT. The VAT payable account
balance is the amount of output VAT reduced by the amount of input VAT on a
cumulative basis. VAT refund receivable is the excess of input VAT over
output VAT.
Construction in Progress
The construction in progress is stated at cost. All direct costs relating
to the construction of the plant are capitalized as long-term assets. No
interest has been capitalized. The Company adopted the provisions of
Statement of Financial Accounting Standards No. 121 (SFAS No. 121)
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of", which requires impairment losses to be recorded
on long-lived assets being developed, based on fair value, when indicators
of impairment are present and the undiscounted cash flows estimated to be
generated by those assets are less than the assets' carrying amount.
Examples of indicators of impairment include a significant decrease in the
market value of an asset, a significant change in the extent or manner in
which an asset is used or a significant adverse change in legal or business
factors that could affect the value of an asset.
Management assessed the fair value of the construction project in Beijing as
of December 31, 1998 and determined that these assets had no future economic
benefits, therefore, elected to write off the balance of $138,519 to zero
and discontinued the project as of December 31, 1998.
Proprietary Technology
The proprietary technology composes mainly of patent and recipes for various
milk products and other drinking products. The proprietary technology is
amortized over a period of ten years starting from April 1995 when the
Company began its commercial production in China.
Organizational expenses
Organizational expenses represents costs incurred in connection with the
setting up of the Company and its plants in order to operate on a commercial
basis. Such costs are capitalized and amortized over a period of five years
from the date of commencement of business.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of financial
statements and the reported amounts of revenue and expenses during the
reporting period. Among the more significant estimates included in these
financial statements are the estimated allowance for doubtful accounts
receivable and the deferred income tax asset allowance. Actual results
could differ from those estimates.
Accounts Receivable and Concentration of Credit Risk
The Company's main business is manufacturing and distribution. Sales are
mainly for cash or on account. The Company reviews its accounts receivable
on a regular basis to determine if any bad debt allowance is necessary at
each year end. The Company maintains its cash accounts in high quality
financial institutions.
Fair Value of Financial Instruments
The carrying amount of cash, trade accounts receivable, notes receivable,
trade accounts payable and accrued payable are reasonable estimates of their
fair value because of the short maturity of these items. The carrying
amounts of the Company's credit facilities approximate fair value because
the interest rates on these instruments are subject to change with market
interest rates.
Income Taxes
The Company accounts for income taxes using the liability method, which
requires an entity to recognize deferred tax liabilities and assets.
Deferred income taxes are recognized based on the differences between the
tax bases of assets and liabilities and their reported amounts in the
financial statements which will result in taxable or deductible amounts in
future years. Further, the effects of enacted tax laws or rate changes are
included as part of deferred tax expenses or benefits in the period that
covers the enactment date. A valuation allowance is recognized if it is
more likely than not that some portion, or all of, a deferred tax asset will
not be realized.
New Accounting Standards Not Adopted Yet
Statement of Financial Accounting Standards No. 131, "Disclosure about
Segments of an Enterprise and Related Information" (SFAS No. 131) supersedes
SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise,"
establishes standards for the way that public enterprises report information
about operating segments in interim financial statements issued to the
public. It also establishes standards for disclosures regarding products
and services, geographic areas and major customers. SFAS No. 131 defines
operating segments as components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in
assessing performance. SFAS No.131 became effective for financial statements
for periods beginning after December 15, 1997. Management believed that the
adoption of SFAS No. 131 will have no significant impact on the Company's
financial statement disclosures.
In February 1998, Statement of Financial Accounting Standards No. 132,
"Employer's Disclosures about Pensions and Other Postretirement Benefits"
(SFAS No. 132) amended the disclosure requirements for pensions and other
postretirement benefits. The Company would not expect the adoption to have
significant change on the Company's financial statement disclosures.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Standards No. 133, "Accounting for Derivative Instruments and
Hedging Activities" (SFAS No. 133). 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 derivatives contracts either
to hedge existing risks or for speculative purposes. Accordingly, the
Company does not expect adoption of the new standard on January 1, 2001 to
affect its financial statements.
The Accounting Standards Executive Committee issued Statement of Position
("SOP") 98-5 "Reporting on the Costs of Start-Up Activities" which will be
effective for financial statements for fiscal years after December 15, 1998
and requires that costs of start-up activities, including organization
costs, be expensed as incurred. In accordance with SOP 98-5, the Company
will write off organizational expenses in 1999.
GREEN FOOD PEREGRINE CHILDREN'S FOOD CO. LTD.
NOTES TO FINANCIAL STATEMENTS
NOTE 1. INVENTORY
Inventory consists of:
<TABLE>
<CAPTION>
December 31,
--------------------
1997 1998
---- ----
<S> <C> <C>
Raw materials $69,678 $40,252
Finished goods 7,869 5,441
--------------------
Total $77,547 $45,693
====================
</TABLE>
NOTE 2. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of:
<TABLE>
<CAPTION>
December 31,
--------------------------
1997 1998
---- ----
<S> <C> <C>
Plant and buildings $ 495,661 $ 495,727
Machinery 1,306,071 1,306,244
Computer, office equipment and furniture 74,174 74,301
Vehicles 236,567 236,598
Construction in progress 138,501 -
--------------------------
2,250,974 2,112,870
Accumulated depreciation and amortization (512,625) (702,691)
--------------------------
Property, plant and equipment, net $1,738,349 $1,410,179
========== ==========
</TABLE>
NOTE 3. BANK LOANS
Loan from Construction Bank of China
In 1993, the Company entered into a loan contract with Construction Bank of
China, a state-owned commercial bank in China, to obtain a loan of
RMB7,500,000 (approximately US$905,819), which matured on December 26, 1996
at an interest rate of 12.24% per annum. The loan contract was guaranteed
by China National Green Food Company. The contract specified that the Bank
would impose a penalty interest rate if the Company should fail to make
proper repayments on a timely basis. The interest rate is subject to change
based on the notices from the People's Bank of China on an annual basis.
On December 26, 1996, GFP failed to pay off the principal and relevant
interest on a timely basis and was subject to a penalty interest rate of
16.43% per annum on the unpaid accumulated interest as of December 31, 1997.
In June 1998, the Company renegotiated the loan and reached agreement with
the Bank on a new repayment schedule. The Bank has agreed to extend the
loan period up to December 31, 1999, specifying, as long as the Company
completes the following repayment schedule, the Company would be released
from penalty interest rate imposed on the interest calculation. The new
repayment schedule is as follows:
RMB1,040,000 (approximately US$125,067) before December 31, 1998
RMB8,595,000 (approximately US$1,038,069) before December 31, 1999
As of December 31, 1998, the Company had the accrued interest payable of
approximately RMB 2,895,000 (approximately US$349,693) and loan principal
payable of RMB7,500,000 (US$905,939).
Loan from Development Bank of China
On December 1, 1994, the Company entered into a loan contract with
Development Bank of China, a state-owned commercial bank in China, to obtain
a loan of RMB2,700,000 (approximately US$325,300) which will mature on
December 31, 2001 at interest rate of 9.9% per annum. The interest rate is
subject to change based on notice from the People's Bank of China on an
annual basis. The loan contract specified that the money should be used to
the Company's Beijing plant and was guaranteed by Chongqing Hotel, an
affiliate entity of China National Green Food Corporation. The loan
contract stipulated that the Bank would have a right to impose a penalty
interest rate if the Company uses the money for any other project. In
addition, the loan contract also specified that the entire amount of
RMB2,700,000 should be paid off in installment by December 31, 2001
In June 1998, the Company renegotiated the loan and reached agreement with
the Bank on a new repayment schedule. The Bank has agreed that as long as
the Company completes the following repayment schedules the Company would be
released from any penalty interest rate imposed on the interest calculation.
The new repayment schedule is as follows:
RMB750,000 (approximately US$90,582) By September 20, 1998
RMB420,000 (approximately US$50,726) By December 20, 1998
RMB420,000 (approximately US$50,726) By March 20, 1999
RMB420,000 (approximately US$50,726) By June 20, 1999
RMB420,000 (approximately US$50,726) By September 20, 1999
RMB420,000 (approximately US$50,726) By December 20, 1999
The remaining balance, if any By December 31, 1999
As of December 31, 1998, the Company had accrued interest payable of
approximately RMB1,160,000 (approximately US$140,119).
NOTE 4. RELATED PARTY TRANSACTIONS
During 1998, CPFC provided the Company with RMB4,379,975 (US$529,066) in
cash as working capital to support its operation. As of December 31, 1998,
the entire balance was recorded as a non-interest bearing loan payable to
CPFC.
NOTE 5. INCOME TAXES
The Company is subject to Chinese Foreign Investment Enterprise Income Tax
of 33%, of which 30% is attributed to the central government and 3% to the
provincial government. As the Company has experienced operating losses since
inception, no income tax was paid for the years 1998 and 1999.
Under the relevant income tax law, a foreign investment enterprise with an
operating period of more than ten years is entitled to a 100% income tax
credit for the initial two years a and 50% income tax credit for the
following three years starting in the first year it has taxable income. In
accordance with China's corporate income tax regulations, the Company had
approximately $5.3 million of net operating loss carryforward available as
of December 31, 1998. Net operating losses are carried forward for five
years.
The components of the net deferred tax asset and liability are as follows:
<TABLE>
<CAPTION>
December 31,
----------------------------
1997 1998
---- ----
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts $ 7,000 $ 6,000
Net operating loss carryforwards 1,303,000 1,741,000
Valuation allowance (1,310,000) (1,747,000)
----------------------------
$ - $ -
============================
</TABLE>
Management is unable to determine whether the realization of the net deferred
tax asset is more likely than not, therefore, a 100% valuation allowance has
been established.
NOTE 6. COMMITMENTS AND CONTINGENCIES
Commitments
The Company has leased the plant land and office building in Shanghai under
operating leases expiring at June 30, 2043 and September 28, 1998,
respectively. Future minimum rental payments required under operating leases
that have an initial or a remaining lease term in excess of one year at
December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Year ending December 31, Amount
- ------------------------ ------
<S> <C>
1999 $ 36,233
2000 36,233
2001 36,233
2002 36,233
2003 36,233
Thereafter 760,888
--------
$942,053
========
</TABLE>
Rental expense for the years ended December 31, 1997 and 1998 was RMB330,000
(approximately US$38,806) and RMB300,000 (approximately US$36,234).
